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iii

v

Strategic Studies Institute

and

U.S. Army War College Press

THE HOUR OF TRUTH: 

THE CONFLICT IN UKRAINE—IMPLICATIONS 

FOR EUROPE’S ENERGY SECURITY 

AND THE LESSONS FOR THE U.S. ARMY

Ariel Cohen 

Ivan Benovic

November 2015

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public release; distribution is unlimited.

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vi

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ISBN 1-58487-709-X
vii

FOREWORD

A large part of Europe, especially Eastern, Northern, Central, and South-Central Europe including the 

Balkans, has been dependent on Russian natural gas 

since the Soviet times. Little changed with the breakup 

of the Soviet Union as Russia was no longer perceived 

as a strategic adversary. Moreover, Russia’s dependence on gas sales in Europe as a source of important 

revenue for the state-owned Gazprom was considered 

a guarantee against the use of gas supply as a strategic 

tool by Moscow. 

However, a dependence on the Russian energy 

supply resulting from a system of pipelines built back 

during the Cold War has increasingly proved to be a 

disrupting, negative factor in European energy security. This dependence already has negatively manifested itself several times throughout the region and has 

a potential to massively disrupt European military, 

economic, and humanitarian situations if a substantial and/or prolonged interruption of the gas supply 

occurs. 

The ongoing hostilities in Ukraine demonstrated 

the adverse effects of the continuing dependence on 

Russian gas and on the top Russian national leaders 

who call the shots on the Russian supply. In view of 

supply interruptions and threats to cut the vital shipments of gas, Russia can no longer be considered a 

stable and reliable supplier. Moscow has a track record of using its gas monopoly not only as a means 

to extort disproportionately high prices for Western 

consumers, but also as a means of exerting political 

pressure to diminish U.S. influence in Europe and to 

drive a wedge between North Atlantic Treaty Organization (NATO) allies.
In case Russia turns off its gas supplies to Europe, 

European countries have limited supplies of stored gas 

(usually only enough for 1 to 2 months of consumption). Supply interruptions would cause significant 

losses for national economies. Therefore, to diminish 

the probability of a conflict in Europe that eventually may require U.S. military intervention, there is 

a need for European countries to diversify their gas 

supplies and find more varied, reliable, and predictable gas suppliers. Thus, in the long run, the European 

Union will have a choice between cheaper but politically unreliable Russian piped gas—and the more expensive but more reliable supplies of liquid natural 

gas from the United States and from other sources 

around the globe, as well as piped gas from Europe’s 

neighborhoods.

The U.S. Government has been involved in European energy security for over 20 years, with the Bill 

Clinton and George Bush administrations’ support 

of the Baku-Tbilisi-Ceyhan Main Oil Export Pipeline 

and of the Southern Corridor. U.S. forces in Europe, 

and the U.S. Army in particular, can and should play 

an important role in promoting energy security, as 

this monograph demonstrates. The U.S. Army, as a 

part of the U.S. military and the leading component 

of NATO, needs to increase its situational awareness 

with regards to the role of energy in security and the 

possible future defense of the North Atlantic Alliance. 

Protection of critical gas facilities and gas transport 

infrastructure should be an important part of NATO’s 

European strategy. 

The U.S. Army has the know-how and capabilities to be an effective and reliable partner for European militaries in developing a system of monitoring 

threats to critical infrastructure, which will help to 

viii
ix

effectively protect energy infrastructure from potential 

sabotage efforts. Furthermore, the U.S. Army can plan 

for adverse scenarios, train and equip regular allied 

armies and irregular friendly forces for energy-related 

emergencies, and for handling scenarios affecting the 

economic well-being of the member continent. 

Security of the energy supply is a crucial area for 

U.S. Transatlantic security interests and will remain 

a top NATO/European Command responsibility for 

years to come.

 

 

 DOUGLAS C. LOVELACE, JR.

 Director

 Strategic Studies Institute and

 U.S. Army War College Press

xi

ABOUT THE AUTHORS

ARIEL COHEN is an internationally renowned expert 

on energy policy, with a particular focus on Russia/

Eurasia, Eastern and Central Europe, and the Middle 

East. He is the Director of The Center for Energy, Natural Resources and Geopolitics (CENRG) at the Institute for Analysis of Global Security (IAGS). CENRG 

focuses on the nexus between energy, geopolitics and 

security, and natural resources and growth. Dr. Cohen also serves as a nonresident Senior Fellow at the 

Atlantic Council, within the Global Energy Center and 

the Dinu Patriciu Eurasia Center. He is the Principal 

of International Market Analysis Ltd., a Washington, 

DC-based advisory firm specializing in energy, natural resources, political risk, and public affairs. He has 

extensive experience consulting for U.S. and foreign 

governments, Fortune 500 companies, and major international law firms. Until July 2014, he was a Senior 

Research Fellow at the Heritage Foundation in Washington, DC. He frequently testifies before U.S. Congressional committees and conducts White House, 

Pentagon, and intelligence community briefings. He 

is a Member of the Advisory Board of the Journal of 

Soviet and Post-Soviet Politics and Society. Dr. Cohen 

has published over 900 articles, six books and monographs, and 30 book chapters. He writes for U.S. and 

international media and regularly appears on CNN, 

NBC, CBS, FOX, C-SPAN, BBC, Al Jazeera, and others. He is a Contributing Editor for the National Interest

and a blogger for the Voice of America and The Wall 

Street Journal’s “The Experts.” 
IVAN BENOVIC currently works for the Ministry of 

Finance of the Slovak Republic in Bratislava, Slovakia. In 2013, he was a member of the Young Leaders 

Program at the Katherine and Shelby Cullom Davis 

Institute for International Policy at the Heritage Foundation in Washington, DC, where he worked with Dr. 

Ariel Cohen. In 2012, he worked at the World Bank in 

Washington, DC, as a short-term consultant. At both 

the World Bank and the Heritage Foundation, he focused on the region of the former Soviet Union. Mr. 

Benovic holds a B.A. degree with honors in international relations from Moscow State Institute of International Relations (MGIMO-University), and an M.A. 

degree in international relations and international 

economics from the Johns Hopkins University, Paul 

H. Nitze School of Advanced International Studies.

xii
xiii

SUMMARY

Natural gas disputes between Russia and Ukraine 

have occurred repeatedly since the breakup of the Soviet Union. However, the 2014-15 wave of these conflicts was also coupled with a Russian-supported war 

in eastern Ukraine. This warfare, together with Gazprom’s shortsighted attitude to its customers’ needs 

and concerns, has made Russia’s natural gas supplies 

unreliable in the eyes of the European Union (EU) 

members. Given the dependence of the Old Continent 

on outside sources of natural gas, the unreliable record of Russia as a supplier has boosted regional cooperation and incentivized the EU as a whole to seek 

solutions to its dangerous dependence. For now, the 

viable solutions for the EU include a partial diversification of the piped supplies to incorporate gas from the 

Caspian region and potentially North Africa and Eastern Mediterranean, coupled with increased amounts 

of gas available as liquified natural gas (LNG) after 

European interconnectors and the multitude of LNG 

projects across the world come online. 

The U.S. Government has been involved in European energy security for over 20 years, and U.S. forces 

in Europe, and the U.S. Army in particular, can and 

should play an important role in promoting energy 

security, as this monograph demonstrates. The U.S. 

Armed Forces have played an important role in providing European security since World War II. Today, 

the U.S. military’s role in European energy security 

can include a comprehensive assessment of the security of European energy imports, including natural 

gas, coal, uranium, and oil. The United States and its 

allies should monitor the threats to pipelines and to 

the natural gas balance through the U.S. intelligence 
xiv

community and their counterparts in Europe, Turkey, 

and the Middle East, and share intelligence where 

possible. 

The North Atlantic Treaty Organization (NATO) 

can develop, in cooperation with European Command 

and Central Command, a system to monitor threats to 

critical energy infrastructure, including to the intraEuropean gas network, especially as interconnectors 

will be a key component of European gas independence from Russia. In particular, the U.S. Army should 

develop joint threat assessment and emergency planning and response protocols as they relate to threats 

to individual gas fields, pipelines, gas processing facilities, storage facilities, pumping stations, and other 

crucial infrastructure components. NATO, as well as 

the individual European, Middle Eastern and North 

African countries, has interoperability standards and 

joint tactics, techniques, and procedures which would 

allow them to coordinate and cooperate in case of 

threats to natural gas infrastructure as recently seen 

in Algeria.1

The U.S. Army should:

• Cooperate with NATO, national militaries of 

NATO members and non-NATO allies, their 

intelligence services and law enforcement, as 

well as with energy companies, to ensure security of pipelines and other gas facilities.

• Prepare for energy crisis-related disaster relief 

in Europe in cooperation with European militaries in the NATO framework and the EU and 

national emergency responders. The U.S. Army 

should build on its experience in developing 

infrastructure protection plans to outline similar plans, programs, and procedures in Europe.
xv

• Train forces for critical energy infrastructure 

protection. The United States has developed 

an effective system of critical infrastructure 

protection at home and can share its expertise 

with its European allies.

• Train and equip local militaries and other 

forces for energy infrastructure protection and 

actively pursue those who are trying to destroy energy infrastructure. Thus, the struggle 

against violent religious extremists is directly 

connected to U.S. efforts to keep oil and gas 

infrastructure, the electricity grids, ports, and 

airports secure.

• Temporarily protect critical energy facilities 

and infrastructure. While the United States is 

in the process of training European forces to 

protect energy infrastructure, it should use its 

own capabilities to ensure proper protection of 

the pipelines and facilities until the European 

forces are capable of performing these tasks on 

their own.

The U.S. Army deployed in Europe is a crucial 

component to NATO providing regional security, 

interacting with NATO and non-NATO allies, and 

assisting in training these allies’ militaries.

ENDNOTE - SUMMARY

1. “Al Qaeda’s North African wing claims two Algerian attacks,” Reuters, June 8, 2015, available from www.

reuters.com/article/2015/06/08/ozatp-us-algeria-security-idAFKBN0OO0GZ20150608, accessed June 20, 2015.

1

THE HOUR OF TRUTH: 

THE CONFLICT IN UKRAINE—IMPLICATIONS 

FOR EUROPE’S ENERGY SECURITY AND THE 

LESSONS FOR THE U.S. ARMY

Ariel Cohen 

Ivan Benovic

INTRODUCTION

Europe’s Dependence on Russian Gas and the 

War in Ukraine.

The series of gas disputes between Russia and 

Ukraine since the breakup of the Soviet Union have 

unveiled the unconditional dependence of Europe on 

Russian piped gas. The last wave of gas disputes between Russia and Ukraine were also combined with 

a violent conflict in eastern Ukraine, primarily in the 

regions of Donetsk and Lugansk. These hostilities in 

eastern Ukraine began in late-2013, when the then 

pro-Russian Ukrainian President Viktor Yanukovich 

refused to sign the Association Agreement with the 

European Union (EU). This provoked anger among 

mostly western Ukrainians who held high expectations for the association of their country with the EU 

and felt betrayed. It led to the so-called Euromaidan 

revolution, which resulted in the violent ousting of 

Yanukovich and the transfer of power to an interim 

pro-EU government. This development of events in 

turn sparked protests in eastern Ukraine among the 

predominantly pro-Russian population, who are suspicious of the EU and other western international 

structures. The hidden but unresolved tensions be-
2

tween the two nations, peacefully coexisting since the 

breakup of the Soviet Union, came to the surface. Russia supported the eastern separatist provinces, which 

has led to a lingering civil war and despair in Ukraine.

Part of the war has been a new wave of gas disputes between the Russian gas giant Gazprom and the 

Ukrainian national gas company Naftogaz. In the conflict with Ukraine, Russia has quickly switched from 

trying to use its natural gas supplies to Ukraine as a 

carrot to attempting to use them as a stick. Russia’s 

behavior since the beginning of the conflict in lateNovember 2013 has demonstrated how easily Russia 

can change its gas policies towards its customers, leaving little room for building stable expectations from 

Moscow as a gas supplier.

In 2014, Europe once again became a hostage of a 

gas dispute, which left little room for the EU to maneuver. It passively watched the conflict unfold and 

tried to play the role of mediator and guarantor to secure gas supplies. This conflict has once again shown 

the EU that its dependence on Russian natural gas, 

without much ability to influence the Kremlin’s behavior, can have dire consequences if it is not solved 

in time. However, it has also united the EU in its quest 

for a way to break free of the dependence on Russian 

natural gas.

History of the Importance of Oil and Gas 

as Strategic Factors.

Natural gas and oil have played an important role 

in European history for decades. Oil and its derivatives were used by ancient Babylonians in construction of their walls and towers, as well as for paving 

their streets.1 The modern history of oil began in the 
3

middle of the 19th century, when Abraham Gesner 

developed methods of distilling liquid fuels from oil.2

Thanks to easy manipulation, oil quickly increased its 

importance simultaneously with the development of 

transportation, both civil and military. The internal 

combustion engine developed by Siegfried Marcus in 

1864 has become the principal consumer of petroleum 

fuels for over a century.3 The Western Ukrainian region of Boryslav in the Carpathian Mountains became 

one of the first provinces of oil production in the 1820s, 

supplying two million tons per year by the beginning 

of the 20th century.4

Several years before the beginning of World War 

I, Winston Churchill launched a wide process of modernization of the Royal Navy, which included a shift 

from using coal to using oil to power ships. Aircraft, 

battle tanks, and trucks, which were used for the first 

time in large numbers in World War I, also consumed 

large quantities of gasoline. The importance of oil became especially clear during War II when Nazi Germany did its best to open its way to the Caspian oil 

fields controlled by the Soviet Union. In 1942, this German effort led to the battle for Stalingrad, which at the 

time was the last obstacle for the Nazis on their way to 

the oil fields of Azerbaijan. Most historians consider it 

the bloodiest battle of World War II, and that, after being won by the Soviet Union at the expense of heavy 

casualties, became the turning point and precipitated 

Germany’s defeat. The operation resulted in around 

1.1 million Red Army soldiers dead, wounded, or 

missing; and more than 800 thousand dead, wounded, 

captured, or missing soldiers on the side of the Axis.5

The significance of oil was also clear to the Allies. 

In August 1943, the U.S. Air Force made an unsuccessful attempt to bomb nine oil refineries near the town 
4

of Ploesti, Romania, in an operation known as Operation TIDAL WAVE. The aim of the operation was to 

curb fuel supplies to the Axis, with which Romania 

sided during the war. The mission failed, the U.S. Air 

Force suffered major casualties, and the bombed refineries were put back online in several weeks after the 

bombing.6

Although natural gas, similarly to oil, was first discovered in ancient times, it did not become important 

until much later. Natural gas acquired wide industrial 

and domestic usage only after World War II, when the 

technology became advanced enough for the United States and Europe to develop a complex system 

of gas pipelines, which in turn gave rise to a multitude of gas-powered electricity generating turbines 

and appliances, such as water heaters, oven ranges, 

boilers, etc.7

Developed countries began building gas pipelines, 

which ensured stable transport of natural gas from the 

fields to individual consumers and industries hundreds of miles away. After World War II, the demand 

for oil and gas became so high that many countries 

blessed by these natural resources turned from nomadic or agrarian societies into raw materials suppliers with relatively small effort. The flipside of this 

rapid influx of money into these countries has been 

that it discouraged them from becoming competitive 

in other sectors in the economy. Instead, they developed a phenomenon known as the “resource curse” or 

“Dutch disease.”8

Russia, despite a broad-based, autarkic industrial 

sector, has not escaped the resource curse. The abundance of oil significantly contributed to the Soviet industrialization in the first half of the 20th century, despite the human cost it entailed. Natural gas became 
5

a preferred fuel of the second half of the 20th century, 

with development of Soyuz and Urengoy–Pomary–Uzhgorod pipelines launched in 1979 and 1984, 

respectively.9

Russia joined the club of countries depending on 

hydrocarbon exports. The initial advantage of the hydrocarbon export-based cash flow backfired against 

Moscow in the late-1980s when it contributed in an 

important way to bringing the Soviet Union to its 

knees with the sharp decline in oil prices in 1986. This 

decline was the result of Soviet over-dependence on 

hydrocarbon hard currency exports and an apparent 

deal between the United States and Saudi Arabia.10 As 

the late Yegor Gaidar conclusively demonstrated, the 

oil price collapse deprived the ailing Soviet economy 

of crucial revenues and precipitated its collapse under 

its own weight.11

Russia as an Unreliable Supplier and Ukraine 

as an Unreliable Transit Country.

The Soviet legacy, shaped by communism which 

taught people to circumvent and fool the system and 

kept afloat by the easy hydrocarbon money, left its 

footprint in the approach of both Russia and Ukraine 

to international business. When it comes to the supply 

of natural gas, both Russia and Ukraine have a record 

of being unpredictable and unreliable partners of the 

EU. Russia is an unreliable supplier because it uses its 

monopoly power to extract short-term political concessions from its European partners and has proven to 

be ready to manipulate the supplies to force its partners to accept its terms. In particular, Russia has several times decreased or cut off gas supplies to Ukraine 

and to some European countries when Ukraine did 

not pay the prices for gas dictated by the Kremlin. This 
6

happened as early as March 1994,12 and then again in 

2006 and 2009, as described later. EU countries not 

as Kremlin-friendly as it would like them to be, such 

as Estonia and Latvia, are not eligible for gas price 

discounts.

Ukraine also proved that it might not always be a 

reliable transit country. It has proven to be willing to 

sacrifice the EU interests in its disputes with Russia in 

order to exert price concessions. Taking the EU as a 

hostage might have worked to deter Russia from cutting off gas supplies or at least lower the chances of 

such steps from the Kremlin. However, as the recent 

past shows, the EU has not been a very effective deterrence factor in the gas disputes between Russia and 

Ukraine.

THE IMPORTANCE OF GAS 

AS A FUEL FOR EUROPE

Overall Natural Gas Significance as a Bridge Fuel 

between Fossil Fuels and Renewables.

Natural gas is considered a golden mean between 

conventional fossil fuels and alternative renewable 

sources of energy. The disadvantage of renewable 

sources of energy is that they are economically not yet 

justifiable and not fully practicable as base-load fuels. 

Their production and usage needs to be systematically 

subsidized, although the per-kilowatt costs are coming down over time. 

On the other hand, the disadvantage of most fossil 

fuels is that they place a heavy burden on the environment and contribute to the climate change. Natural gas lays in between. It is cheaper than renewable 

sources of energy and significantly cleaner than most 
7

other fossil fuels. Therefore, the role of natural gas in 

advanced economies is likely to grow in the future.

Consumption, Trends, and Usage.

Due to the aftermath of the 2008 economic crisis, 

characterized by low growth and development of energy-efficient technologies, natural gas consumption 

in Europe has been stagnant or falling over the past 

several years. According to Eurostat (the EU statistical 

agency), in 2013, the EU consumption of natural gas 

decreased by 0.4 percent in comparison with 2012, 

when less than 5,000 terawatt hours (TWh) were used. 

This is roughly equivalent to 450 billion cubic meters 

(bcm).13

Levels of consumption fluctuate. According to Eurostat, the share of Russia in the overall EU imports of 

natural gas rose drastically from around 17.5 percent 

of all imports in 2012 to 30.9 percent in 2013.14 This is 

an unexpected development after the steady decline in 

the Russian share in the EU gas imports since 2003. In 

2014, Russia remained EU’s main gas supplier, but its 

share in the overall EU gas imports slightly declined 

from 43 to 42 percent.15

According to preliminary data from Eurostat, the 

overall EU consumption of natural gas fell by around 

22 percent annually between the first quarter of 2014 

and the same period of 2013.16 Overall, in 2014, EU 

gas consumption fell by 10 percent relative to 2013, 

according to preliminary estimates of the European 

Commission.17 Because of that, EU imports of natural gas fell by around 8 percent over the same period. 

However, this high number may be partly caused 

by an exceptionally cold winter in early-2013, which 

caused natural gas consumption to spike. Still, the 

EU gas consumption has been steadily declining over 
8

the past 5-year period from around 20.8 million TWh 

in 2010 to around 18 million TWh in 2013.18 The reason for the drop in the overall EU gas consumption 

is the fact that electricity consumption in the EU is 

declining.

Contrary to the previous trends of the past several 

years when Russian piped gas exports were slightly 

falling, Russian exports of piped gas to the EU rapidly 

increased in the last quarter of 2013 and reached historically record numbers of around 11-bcm in December 2013.19 For the first time, Russian gas imports to 

the EU exceeded those from Norway. Unlike the gas 

imports from Norway and North Africa, Russian gas 

exports to the EU have also been increasing steadily 

without the characteristic seasonal fluctuations between the winter and the summer months. Over the 

past 2 years, during winter months, the EU has imported around twice as much gas from Norway and 

North Africa as in summer.

LNG is another viable source of gas for Europe. 

LNG imports to the EU have been in decline since 

2011 due to high prices in comparison to piped gas. 

Between 2011 and 2012, LNG imports fell by 28 percent.20 Between 2012 and 2013, the imports fell by 

another 29.1 percent.21 In the first half of 2014, LNG 

imports were 5 percent below their levels in the same 

period of 2013. One of the reasons for this decline may 

be the coincidence of the overall drop in gas consumption, together with Gazprom easing the contractual 

“take-or-pay” obligations for the EU gas distribution 

companies, making Russian gas more attractive. In 

case of an insufficiently high demand for gas, this 

principle may make it cheaper for the gas distribution companies to import the already contracted gas 

from Gazprom rather than to pay the penalty for not 

importing the required amount.
9

The majority of the drop in LNG imports were 

accounted for by Greece (-52 percent), Belgium (-35 

percent), Spain (-34 percent), the Netherlands (-32 

percent), and the United Kingdom (UK -32 percent).22

By contrast, LNG imports to Asia have been growing 

over the past couple of years, mainly due to the lucrative price margins in the Asian gas markets, with 

China experiencing a 23 percent increase and South 

Korea experiencing an 11 percent increase in volume 

from 2012 to 2013.23 Thus, due to the imports decline, 

the EU share in global LNG trade fell by 13 percentage points: from 29 percent to only 16 percent during 2009-13. In addition, 2 percent of the global LNG 

market consisted of LNG re-exports, with around 95 

percent of those re-exports coming from Europe. In an 

era of high spot prices, the price differential between 

the LNG price in Europe and the price in Asia made 

it profitable for some companies to re-export already–

contracted gas back to Asia.

The total LNG regasification capacity in the EU 

(i.e., the import capacity of the EU LNG terminals) is 

around 200-bcm per year (as of the end of 2014, excluding small-scale LNG terminals), while by 2022, 

this capacity is planned to be increased to 275-bcm. 

This capacity should be sufficient to cover the EU’s 

LNG import needs handily even in case of a substantial decline in imports of the Russian piped gas. 

The supply constraints remain due to the limitations 

in Europe’s internal pipeline network, especially of 

Central Europe, as will be explained later in detail.

Coal: An Environmentally Problematic 

Energy Source.

Besides CO2 emissions, burning coal pollutes the 

environment with a range of toxic gasses, such as 
10

SO2 and other toxic substances, such as NOx and SOx 

known as soxes and noxes. Coal, especially “brown” 

coal (lignite), is the most polluting source of electricity 

if we take into account the ratio of emissions produced 

per unit of generated electricity. Black coal (anthracite) 

emits significantly fewer collateral toxins than brown 

coal. However, anthracite actually produces 6 percent 

higher CO2 emissions than lignite.24 Burning black 

coal emits two times as much CO2 as burning natural 

gas in order to produce the same amount of energy. In 

addition to that, unlike natural gas, burning coal also 

emits the toxic NOx and SOx.

In times when the EU is trying to find ways of curbing pollution and improving its environmental standards, other, cleaner sources of energy are and will be 

preferred over coal. In particular, the Industrial Emissions Directive (IED No. 2010/75/EU), adopted by the 

EU in 2010, states that industrial installations have to 

ensure that they cause no significant pollution; that 

their waste is reduced, recycled, or disposed of in the 

manner which creates the least pollution; and that 

they maximize their energy efficiency.25 The rules are 

scheduled to go into effect in 2016. 

One of the toughest components for coal power 

plants to meet will be the NOx limits (200 microgram 

per cubic meter) because burning coal produces large 

quantities of such emissions. In addition to that, there 

is space for a downward revision of the limit, which 

would put additional burden to any industry burning 

coal, and incentivize it to shift to natural gas. Figure 1 

shows a comparison of the amount of CO2 emissions 

from burning different types of fossil fuel.26
11

Source: U.S. Energy Information Administration.

Figure 1. Pounds of C02 Emitted per Million BTU.

EU energy companies already pay additional costs 

under the EU emissions trading scheme (ETS), which 

is designed to motivate the industries to modernize 

and to pollute as little as possible. The UK came up 

with an additional measure to curb its CO2 emissions. 

It is the so called carbon price floor, which is basically 

a UK national tax aimed at increasing the existing EU 

price of carbon in case the price of carbon under the 

EU ETS falls below a certain target. Such measures put 

pressure on the energy firms and are likely to encourage them to shift to natural gas.

Vincent de Rivaz, chief executive of the ‘Electricite’ 

de France Energy, the UK’s largest producer of lowcarbon electricity, argues that the carbon price floor 

and the EU policies aimed at reducing the carbon footprint are generally working.27 First, these measures are 

encouraging firms to shift away from coal to low(er)-

carbon power generation. Second, they incentivize 
12

investment into renewable sources of power generation, such as wind, biomass, and nuclear. Under these 

regulations, renewable sources are more economically 

viable than would be the case if greenhouse gas emissions were not regulated. Given the widespread public suspicion of nuclear energy, especially after the Fukushima accident in March 2011, the strongest effect 

of these policies is likely to be a continuing shift from 

coal to natural gas—before shifting to renewables at a 

larger scale when their economics improve.

However, another tendency is running opposite 

to the EU efforts and is changing the calculations of 

European energy companies in favor of burning more 

coal. The U.S. shale gas revolution sent gas prices in 

the United States to record lows and freed a large 

quantity of U.S. coal for exports, which is increasingly 

being purchased by Europe.28 In the first 6 months 

of 2012, European purchases of American coal rose 

by a third. Nevertheless, according to data from the 

U.S. Energy Information Administration, this trend 

changed in 2014, when U.S. exports of coal to Europe 

declined from 60.8 million tons in 2013 to 52.5 million. 

France and the UK saw the most significant decline in 

imports in absolute numbers.29

Germany, which is at the forefront of the efforts 

towards cleaner energy in the EU, continues to burn a 

lot of coal to generate its electricity. In 2012, the share 

of coal in the electricity production of Rheinisch-Westfalische Elektrizitatswerke, a German energy giant, 

increased to 72 percent in the first 9 months of 2012, 

compared to 66 percent in the same period of 2011. 

This trend is expected to continue until 2016, when 

the IED comes into force. However, due to a range of 

exceptions in the IED, some coal power plants will be 

able to continue operating for several years beyond 
13

2016 and its provisions will thus be diluted. Nevertheless, tougher EU pollution rules resulting from the 

IED may push coal power plants out of business by 

the early-2020s.30

High Cost and Other Challenges of Renewables.

Renewable energy has been a focus of the environmentalists mainly due to the contemporary environmental and global climate change concerns. Historically, therefore, governments bought renewable 

energy paid for by various direct or indirect subsidies. 

However, renewable sources of energy and the subsidies to make them more sustainable have had a side 

effect of pushing electricity prices in Germany and 

some European countries too high for the industry to 

remain competitive in the long run. Some economists 

believe that this may result in capital flight to destinations with cheaper energy, including the United 

States.31

In Germany, the so-called “Energiewende,” or 

“energy change,” is a large-scale project of the German government to shift from nuclear power and fossil fuels to renewables. The goal of this energy change 

is to be producing 40 to 45 percent of its electricity 

from renewables by 2025.32 However, there are worries that this energy change may undermine the German industrial base and drag down the entire European economy due to the spillover effects. The average 

electricity prices for companies have risen by around 

60 percent over the past 5 years. These increasing 

electricity prices are considered a major concern for 

around 75 percent of Germany’s small and mediumsize industrial businesses.

Another negative consequence of the German efforts to increase the share of renewables in its energy 
14

production is the public protests it sparks. The new 

sources of energy will also need new transmission lines 

and other infrastructure that will have to run through 

new lands. This leads to the traditional NIMBY (“not 

in my backyard”) problem. For instance, people in 

many German villages have protested against power 

companies laying transmission cables over their villages. They are afraid of the effect of such transmission lines on health due to low frequency radiation, 

of the potential negative impact on tourism as the 

landscapes will not be as picturesque as before, etc. 

Regardless of whether these fears are justified or not, 

they are an additional factor that makes overcoming 

the dependence on fossil fuels even more difficult.

Other countries have targets that are more modest when it comes to the share of renewables in their 

energy mix. France’s goal is to increase the share of renewables in its gross final energy production by 2020 

by around 13 percentage points compared to 2005.33

This may still prove to be too ambitious. According 

to the EU Directive 2009/28/EC, 17 percent of Italy’s 

energy consumption has to be covered by renewable 

sources, compared to 4.92 percent in 2005.34 Overall, 

regardless of how successful Germany is with its Energiewende and how successful the other EU countries are in achieving their aforementioned goals, both 

Germany and the rest of the EU will inevitably need 

fossil fuels in the foreseeable future. Due to the environmental constraints, the one fossil fuel in highest 

demand will most likely be natural gas.

Current economic growth forecasts for the EU tend 

to be moderately positive. Moody’s projects economic 

growth to be 1 and 1.5 percent in 2015 and 2016, respectively.35 Nevertheless, according to Moody’s Investors 

Service, a number of EU countries, such as Italy, Por-
15

tugal, and Spain, are not expected to reach even their 

pre-crisis gross domestic product (GDP) levels by the 

end of 2016. In the longer run, the EU’s real economic 

growth is projected to be positive, within the range of 

2 to 3 percent until 2025, with a tendency to slightly 

slow down towards the end of the period.36 Therefore, 

given the sluggish EU growth projected for the next 

10 years and no clear improvement on the horizon, 

coupled with gradually increasing energy efficiency 

across the continent, one should not expect a significant rise in gas consumption in the EU.

CURRENT AND POTENTIAL GAS ROUTES 

FROM RUSSIA TO EUROPE 

Ukraine.

Currently, Ukraine is still one of the main transit 

routes for Russian gas flowing to Europe. Natural gas 

flows to Ukraine by 22 major gas pipelines (Soyuz, 

Progress, Urengoy-Pomary-Uzhgorod, etc.) and 

leaves the country by 15 pipelines. As of July 2014, 

Ukraine’s gas grid looked like Figure 2.37
16

Source: East European Gas Analysis.

Figure 2. Ukraine’s Gas Pipeline Network 

as of July 2014.

The history of the Ukrainian gas pipeline network 

dates back to the 1910s, when the first gas pipeline 

was constructed in the region of L’viv/Lemberg/

Lvov.38 In 1945, Ukraine first started exporting natural 

gas, with its first destination being Poland. In 1948, the 

Dashava-Kyiv gas pipeline—the largest gas pipeline 

in Europe at the time—was put into operation, and in 

1951, the pipeline reached Moscow. The construction 

of the pipelines continued, with new pipelines being 

built in 1960 and 1967. These new pipelines allowed 

Ukraine to export gas to Belarus and to today’s EU 

countries, such as Austria and the Czech Republic.

The break-up of the Soviet Union plunged the 

Ukrainian gas pipeline network into a crisis. The 

Union of Soviet Socialist Republics (USSR) did not 
17

design major pipelines as international gas transit 

routes; they became a part of an international gas export system years after they were constructed.39 This 

has led to the fact that the transit of the gas could not 

be operated independently of Ukraine’s now domestic gas network. In addition, most of the system was 

built in the Brezhnev era, and, due to the natural life 

span of the pipelines, maintenance and repair costs 

have risen since the break-up of the USSR.

Belarus.

Belarus has been an important transit country for 

the Russian gas since 1999, when the Yamal pipeline 

was launched. In 2005, the pipeline reached its projected capacity of 33-bcm of gas per year. Before that, 

Ukraine was the only transit route of the Russian gas 

to Europe, which put both Russia and Europe at risk 

of supply cutoffs. While Gazprom owns the section of 

the pipeline in the territory of the Russian Federation, 

Beltransgaz owns the Belarusian section. However, 

Beltransgaz is entirely owned by Gazprom, which allows Gazprom to control the Belarusian section of the 

pipeline. Belarus pays only around $160 per 1,000 cubic meters of Russian gas—significantly less than the 

EU countries.

Nord Stream.

The Nord Stream was launched in September 2011 

in response to the Russian-Ukrainian gas crisis of 2009. 

Its second thread was launched in 2012, doubling its 

capacity. Both threads of the pipeline transfer around 

55-bcm of gas per year directly from Russia to Germany. This pipeline allowed Russia to redirect a part 
18

of its gas exports to Europe from their initial route to 

Ukraine and transfer this gas directly to its end consumers in Europe. This pipeline has faced a great deal 

of criticism from a wide array of experts and policymakers. For instance, Radoslaw Sikorski, Speaker 

of the Sejm and Poland’s former foreign minister, 

compared this pipeline to the infamous RibbentropMolotov Pact of 1939, as a result of which Germany 

and the Soviet Union invaded Poland, thus launching 

World War II. There are also fears that Russia might 

use this pipeline for attempts to exert political concessions from the EU. 

The Nord Stream project, which German companies would like to expand further, together with 

Russia’s refusal to ratify the Energy Charter Treaty, 

poses a security risk to Europe. It increases Europe’s 

dependence on Russian gas, facilitating Russia’s ability to use its gas supplies as leverage against the EU in 

order to foster the pro-Kremlin policies. Among other 

things, Russia’s refusal to ratify the Treaty stems from 

its desire to have less competition among its European gas consumers, which currently allows Gazprom 

to charge each of its European consumer countries a 

different price—a practice forbidden by the Treaty. 

In other words, Gazprom has pursued the “divide 

and rule” policy, which allowed it to pressure each 

European country dependent on its gas to exert more 

favorable terms both economically and politically.

Gazprom’s influence could be observed for the 

past 1 1/2 years when the EU was conducting internal negotiations about imposing sanctions on Russia 

due to its annexation of the Crimea and support for 

eastern Ukrainian separatists. Although Russian gas 

was not the only factor, the Central European countries, such as Hungary, Austria, and Slovakia, as well 
19

as Serbia that depend more on Russian gas, tended to 

promote a more reserved policy towards imposing 

sanctions on Russia due to their concerns about their 

gas supplies.

South Stream and Its Alternatives after the 

Cancellation of the Project.

The original goal of the South Stream, the construction of which was canceled in December 2014, was 

to deliver Russian gas directly to the EU, bypassing 

Ukraine. Russia hoped that by building and launching 

the South Stream, it would solve the recurring problem of insecure transit through Ukraine and would 

strengthen its position in its negotiations with Kyiv. 

The capacity of the South Stream was planned to be 

63-bcm per year, which is equivalent to around 12 percent of the EU gas consumption in 2014. 

According to the initial plans, the South Stream 

was expected to be operational by 2018. The pipeline 

was planned to run from Russia, through the Black 

Sea, through Bulgaria, Serbia, and Hungary to Austria. However, since the beginning of its construction, 

the South Stream posed a dilemma for Europe. On the 

one hand, it would contribute to the independence of 

Europe from Ukraine as a gas transit country. On the 

other, it would further increase European dependence 

on Russian gas and make alternative routes commercially unattractive.

The construction of the pipeline was fraught with 

problems from its very beginning. In June 2014, the 

European Commission voiced its concerns about the 

compliance of the construction of the South Stream 

in Bulgaria with the EU legislation.40 The main problems were that, according to the agreements between 
20

Bulgaria and Gazprom, Gazprom was able to circumvent the EU competition rules and that Russian and 

Bulgarian sub-contractors would be given preference 

in public procurement for the construction of the 

pipeline.

In August 2014, Bulgaria announced that it ceased 

work on the construction of its section of the pipeline.41

A 541 kilometers (km)-long section of the pipeline was 

planned to run through the country. Then Bulgarian 

Prime Minister Plamen Oresharski announced this 

decision shortly after his meeting with U.S. Senators 

John McCain, Chris Murphy, and Ron Johnson in 

Bulgaria, which triggered speculations in the Russian 

media about the potential U.S. involvement in the decision and that pressure was put on Bulgaria to adopt 

such a decision. At the same time, Bulgaria says the 

project is “irreversible and important for both Europe 

and Bulgaria.”42

After Bulgaria, the Serbian government, in particular Serbian former transport minister Zorana Mikhajlovic, also announced that Serbia would be suspending work on its part of the South Stream.43 Presumably, 

the reason was that Serbia was waiting for the resolution of the dispute between the European Commission 

and Bulgaria regarding the Bulgarian section of the 

pipeline. However, later, the Serbian Prime Minister 

Alexander Vucic denied Mikhajlovic’s announcement 

and said that the work was continuing as planned.44

According to the Russian media, it was a matter of 

time until someone in Serbia would take advantage 

of the fact that Bulgaria suspended work on its part 

of the pipeline and would push for the same thing in 

Serbia.45 Serbia is trying to sit on two chairs at once—

to maintain its friendly ties with Moscow and to be a 

responsible ally of the West. According to the Russian 
21

media, the decision of Bulgaria to suspend the construction of the pipeline, and also the Serbian voices 

to do the same, seemed to be a result of the pressure 

from the West to sanction Russia, in addition to the direct sanctions imposed by Brussels and Washington. 

Serbia, as a country aspiring to join the EU and suffering from a severely diminished geopolitical clout, had 

to adapt to the changing environment.

On December 2, 2014, Russian President Vladimir 

Putin announced during his official visit to Turkey 

that construction of the South Stream project would 

not continue.46 On the one hand, this is good news for 

Ukraine and other transit countries, such as Slovakia, 

which will continue receiving millions of dollars for 

transit of gas to Central Europe and further to the 

West. As long as the EU needs Russian gas, Ukraine 

will continue to serve as an important gas transit 

route, because the Nord Stream, which transports gas 

directly from Russia to Germany, is not able to supply 

all the Russian gas the EU may need.

On the other, this is a defeat for Russia. Due to the 

introduction of the EU third energy package and the 

related compliance issues, and following the EU sanctions against Russia, the completion of this project 

became virtually impossible. The decision to end the 

project prematurely also means that Russia suffered 

a loss of around $9.4 billion, for which they will not 

be reimbursed. After the announcement of the South 

Stream closure, Russia proclaimed that it now intends 

to concentrate on building a hub near the TurkishBulgarian border and on supplying gas to Turkey 

through the new project called Turkstream. Instead of 

the South Stream, Russia intends to build a new pipeline to Turkey with the projected capacity of 63-bcm 

per year—same as the South Stream. 
22

Turkey is expected to consume only 16-bcm of that 

volume.47 The remaining 40-bcm is to be distributed 

to the Balkans and to Central Europe. Russia also intends to build a gas hub at the Turkish-Bulgarian border. This gas hub would be open for Bulgaria, Serbia, 

and other Balkan countries in case the EU reconsiders its previous stance and decides to connect to the 

southern route of the Russian gas. This seems to be 

the second best option after the South Stream. In case 

the EU decides to connect, no matter how unlikely in 

practice that is, Russia would achieve its original goal 

to transport gas to the EU through the Balkans, albeit 

with higher upfront costs for construction of the infrastructure.

The decision to stop construction of the South 

Stream opens up alternative variants of transporting 

Russian gas to the Balkans. For instance, Eustream, 

the Slovak gas pipeline operator, proposed to build 

a pipeline from Western Europe through Slovakia to 

Ukraine, Hungary, Romania, Bulgaria, and possibly 

the Balkans.48 The project would be called Eastring 

and should be able to alleviate the strong dependence 

of some Balkan countries on Russian gas. Serbia and 

Bulgaria would be able to receive gas even if the transit of gas through Ukraine is cut off. The pipeline that 

needs to be constructed would be only 570-km long, 

as it would also take advantage of the already existing pipeline network. This new section of the pipeline 

would go mainly through Romania and would connect to the main Balkan pipeline running to the shore 

of the Black Sea. The proposed capacity of this new 

project is 20-bcm per year. It would be able to supply 

the Balkans with either Russian or Western gas.
23

Liquefied Natural Gas.

One of the most viable alternatives to Russian gas 

is liquefied natural gas (LNG). The EU currently imports LNG mainly from the Middle East, especially 

Qatar, but supplies from the United States are expected to come online in the next several years. LNG 

exports from the United States also seem promising if, 

after the U.S. LNG becomes available in 2018, the cost 

is price-competitive against Russian pipelined gas. 

The question is whether U.S. gas can become a perfect 

substitute in terms of price, reliability, and quantity.49

First, liquefaction and transportation of the gas adds 

a significant amount to the cost, which may deprive 

the U.S. LNG of its initially expected competitive advantage. Second, U.S. LNG exports may raise domestic prices because part of the gas that would normally 

end up in the United States will then be exported at 

higher price margins. There are three answers to these 

arguments. First, the Europeans, including the Lithuanians who have built a floating regasification terminal, would like to add U.S.-produced natural gas to 

the source mix for security reasons. Second, production efficiencies still keep the gas competitive on price. 

Finally, the higher domestic price of the U.S. gas is in 

the interest of the gas industry.

STRATEGIC DEPENDENCE OF EUROPE 

ON RUSSIAN GAS AND RUSSIA-UKRAINE 

GAS DISPUTES

Dependence of Western Europe on Russian Gas.

Russia constitutes a relatively small share of the 

Western Europe gas consumption which varies by 

country. For now, the UK has its own gas sources and 
24

does not need to rely on gas imports. Spain gets its 

gas from North Africa, mainly Algeria, which in 2013 

supplied 39 percent of Spain’s gas needs.50 France purchased approximately 19 percent of its gas from Russia in 2013.51 Approximately 48 percent of Germany’s 

gas needs were met by Russian gas imports in 2013, 

mainly through the Nord Stream pipeline. Italy and 

Austria depend on Russian gas imports for 39 and 60 

percent, respectively. Thus, most countries of Western 

Europe cover a significant share of their gas consumption by Russian gas imports.

Dependence of Eastern and Central Europe 

on Russian Gas.

Although the percentages within the region vary, 

Central and Eastern Europe depend significantly 

more on Russian gas imports than does Western Europe. The countries that depend most on Russia are 

the Baltic States, which purchase 100 percent of their 

gas from Russia.52 This is about to change: Estonia 

is planning to build a pipeline to connect it to Finland to receive Norwegian gas. Lithuania has built a 

floating liquefied natural gas terminal as mentioned 

previously.53

Central Europe imports less percentage-wise, but 

not significantly. In 2013, the Czech Republic and Slovakia imported 86 and 98 percent of their gas from 

Russia, respectively. Poland and Hungary imported 

57 and 68 percent, respectively. Bulgaria imported 93 

percent of its gas from Russia in 2013,54 and Romania 

imported around 10 percent.55 Thus, it is the Baltic 

States, Central Europe, and the Balkans that depend 

most on Russian gas, and this is why the EU does not 

have as much space for maneuver vis-à-vis Russia as 
25

it might if the dependence of several of its members 

was not as high.

Seasonal Dependence.

European gas consumption varies dramatically 

between the seasons: summer consumption is as little 

as 40 percent of the winter consumption. Thus, the 

dependence of Europe on Russian gas is the lowest 

in summer and the highest in winter due to heating 

needs and shorter days, which require more lighting. 

Therefore, in summer, Europe, on average, depends 

less on Russian gas and would be able to cover its consumption by exploiting sources of gas other than Russia, especially if Europe builds an efficient network of 

pipeline interconnectors between the EU countries. 

Additionally, in summer, gas companies are usually 

refilling their reservoirs in preparation for the upcoming winter, driving up otherwise sluggish demand.

Disputes in the 1990s.

Strains in the Russian-Ukrainian natural gas relations appeared at the dawn of Ukraine’s political 

independence in the first half of the 1990s. The problems that lay at the core of the disputes were similar to 

the ones in subsequent gas conflicts between the two 

countries: Ukraine was unwilling and unable to pay 

for the gas it was receiving from Russia, while Russia 

kept lowering its gas supplies to Ukraine in order to 

force it to improve its payment discipline. 

As a result, the amounts of gas transited through 

Ukraine to Europe kept fluctuating. Even worse for 

Europe was that, in the 1990s, Ukraine was the only 

transit route for the Russian gas that Europe received, 

highlighting the importance of Russian-Ukrainian 
26

and Russian-European relations. A complicating factor was Ukraine’s energy inefficiency, which resulted 

from the Soviet legacy.56 The USSR functioned without 

a convertible hard currency—instead, the ruble was a 

fiat money, with Gosplan central planning, and only 

with a tenuous accounting system. 

This situation has defined the energy sector as 

well. In 1991, Ukraine’s total fossil fuel consumption 

amounted to 202 million tons of oil equivalent, out of 

which approximately 50 percent was imported.57 As 

for natural gas, Ukraine imported 77 percent of the gas 

it consumed that year, while producing the rest from 

its domestic gas wells. Ukraine’s industry, which was 

built on the Soviet cheap energy and was largely energy inefficient, was responsible for the excessive consumption. The high degree of dependence on Russian 

energy supplies did not allow Ukraine to attain real 

independence from Russia. By early-1994, Ukraine’s 

debt to Russia was estimated to be around $2 billion, 

most of which was the Ukrainian debt for Russian 

gas.58 In this situation, Russia could either change the 

supplied volumes of gas or change its price. Moscow 

already had started using natural gas as a political leverage. It offered discounted gas prices to the other 

former Soviet Union countries in exchange for political concessions, mainly participating in Russia-led 

political integration organizations, such as the Commonwealth of Independent States (CIS). This Russian negotiation tactic went the furthest with Belarus, 

which is now part of a so-called “united state” with 

Russia. Belarus has lost most of its independence in 

exchange for cheap oil and gas and the intermediary 

role in energy trade.

An International Monetary Fund (IMF) paper published in 1997 argues that the main reasons for the 
27

piling up of the Ukrainian debt in the 1990s was the 

sluggish growth of its economy, government intervention in the energy prices to keep up subsidies for 

households, and privileged oligarchs. Other government nonprice interventions in the gas market, such 

as setting regional consumption quotas or the laxity 

in the enforcement of sanctions towards nonpayers, 

played a role in the mushrooming debt as well.59 Thus, 

the government could not pay Gazprom because the 

government itself suffered from lack of payments 

due to its own policies and limitations. Russia used 

this piling debt as leverage to achieve its geopolitical objectives, including the deployment of the Black 

Sea Fleet in Crimea, the return of the Soviet nuclear 

arsenal60 deployed in Ukraine before the breakup of 

the Soviet Union, etc. By carefully adjusting the gas 

price for Ukraine while keeping it below the market 

level, Russia achieved two objectives simultaneously: 

It kept Ukraine relatively afloat economically, ensuring at least partial payments, and at the same time 

achieved its strategic priorities.

The Russian-Ukrainian gas relations in the 1990s 

reached their bottom in 1993-94, when the first gas crisis erupted between Kyiv and Moscow. The Russian 

pursuit of ownership and control of Ukrainian gas 

and oil facilities, instead of merely seeking political 

concessions from Kyiv, triggered a shift in the policy. 

If Russia had taken ownership of the Ukrainian gas 

network, it would have deprived Ukraine of its major leverage, i.e., its ability to keep Europe hostage 

by stopping the transit of Russian gas. Such a step by 

Moscow inevitably would outrage Europe, a major 

source of hard currency revenue for Russia, which 

was at that time politically and economically much 

weaker than in the 2000s.
28

In February 1994, Gazprom started reducing 

its gas supplies to Ukraine due to the country’s piling debt. Moscow reduced the supplies to around 

10 percent of their original volume. Russian officials 

emphasized that they were ready to accept property 

rights of the Ukrainian gas network as a substitute for 

Ukraine repaying its $1 billion gas debt in cash. The 

parties reached an initial preliminary deal in March 

that Ukraine would repay part of its gas debt, and 

that Gazprom would acquire a 51 percent share of the 

Ukrainian gas transit network. However, in the end, 

the parties did not strike a deal. 

Instead, Ukraine passed laws to prevent its gas 

transit network from being privatized and became 

more prompt with paying its gas bills, which was facilitated by the help of Western financial institutions. 

In early-May 2014, Ukraine received the first tranche 

of $3.19 billion of its $17 billion IMF package, using 

a part of the amount to pay Ukraine’s overdue gas 

bills to Gazprom.61 The IMF acknowledged that part 

of the package would be used to pay off both overdue and future energy bills, while the rest was aimed 

at supporting the Ukrainian economy. It seemed that 

Ukraine learned its lesson that the Russian threats of 

cutting off the gas supplies can be prevented by paying its gas bills on time, which would deprive Russia 

of most of its economic incentives and political excuses 

to cut off its gas supplies. However, Ukraine did not 

learn its lesson and started again piling debt, which 

resulted in a series of gas disputes in the 21st century 

(see infra). In the meantime, Russia continued behaving as a traditionalist power, backing its diplomacy by 

force and coercion.62
29

Gas Dispute of 2005-06.

In May 2005, an issue between Gazprom and 

Ukraine emerged regarding the usability of Gazprom’s gas in the reservoirs on the Ukrainian territory for sales to Europe. Gazprom made 40 requests 

to Ukraine between October 14, 2014, and March 22, 

2005, to make the stored gas available.63 Ukraine did 

not approve any of these requests. In turn, Gazprom 

threatened to subtract the volumes from its transit inkind payments, which would mean a serious shortage 

of gas for Ukraine. In turn, Ukraine threatened to use 

part of the gas intended for European sales for its own 

needs, which could jeopardize the continuity of gas 

supplies to the EU. This incident was later resolved 

with an agreement to release the withheld amounts of 

gas to Russia.

In 2005, the Ukrainian government, led at the time 

by President Viktor Yushchenko, raised objections to 

the earlier amount of natural gas debt that Ukraine 

had agreed to pay to Moscow, calling the amount 

excessive. As the oil prices skyrocketed in the 2000s, 

the gas prices, which were indexed to oil, also mushroomed, causing the debt to spike. Russia complained 

about Ukraine and other CIS countries paying three 

to four times less than the price the EU countries were 

paying. 

Gazprom demanded Ukraine to either start paying EU-level prices from the beginning of 2006 or allow Gazprom to acquire a share in the Ukrainian gas 

transit pipeline network (similar to the demand of the 

mid-1990s). Ukraine responded as it did in the 1990s, 

saying that it was ready to pay the market price, but 

under a condition that the transfer to the market price 

would have to be gradual. The initially hardline stance 

of Gazprom and the Russian leadership softened. Gaz-
30

prom announced that it was ready to provide loans to 

Ukraine, which Ukraine would then use to pay Russia 

back for its gas.

However, Ukraine rejected this Russian proposal. 

Gazprom in turn cut off its supplies to Ukraine. Gazprom insisted that it was pumping enough gas intended for Europe, while Ukraine claimed that it did 

not divert any gas from the system and passed the 

entire amount through its territory to the EU. The EU 

countries that were most affected by the cutoff were 

Hungary, Austria, Slovakia, Romania, France, Poland, 

and Italy. The crisis lasted only for several days. On 

January 4, 2006, gas deliveries to the EU were restored 

to their previous levels, and end consumers in the EU 

did not experience shortfalls due to national gas reserves and a mild winter at that time. 

Although an agreement between Russia’s Gazprom and Ukraine’s Naftogaz was reached, it resolved largely secondary issues, e.g., the modalities of 

distributing gas in Ukraine and the transit fee for the 

gas exported to the EU. The primary issue, which was 

the long-term price for gas consumed by Ukraine, and 

Kyiv’s inability to sustain its gas “habit,” remained unresolved. This dispute was another example of Russia 

attempting to blackmail Ukraine by using gas prices to 

pursue its political goals. Belarus and other countries 

with more Russia-friendly governments than Ukraine 

were paying a fraction of the price Ukraine was forced 

to pay. Despite the crisis’s short duration, it damaged 

the trust of the EU members in Russia’s reliability as a 

gas supplier—something Russia further undermined 

in January 2009 and continues doing to this day. The 

EU realized that it was not strategically beneficial to be 

overly dependent on a single gas supplier, especially 

if that oligopolistic gas supplier was as unpredictable 

as Russia.
31

Gas Dispute of 2009. 

The gas dispute between Russia and Ukraine in 

January 2009 has so far been the most serious of its 

kind. It was not as long as the conflict of 2014, but was 

more intense and led to direct economic losses for 

Russia, Ukraine, and the EU countries of Central Europe. Similar to the previous disputes, the core of the 

2009 gas conflict was the sale price for the Russian gas. 

Russia increased the gas price from $130 in 2007 to 

$179.50 per 1,000 cubic meters in 2008.64 Information 

about Ukraine illicitly diverting gas from its transit 

network for resale started appearing in February 2008. 

In March 2008, Gazprom lowered the pressure in the 

Ukrainian transit network, leading to lower volumes. 

Naftogaz responded by warning that, given the situation, it could not guarantee stability of the gas transit 

to the EU. 

The two countries attempted to resolve the issue, 

but ran into problems. In October 2008, Putin and the 

then-Ukrainian Prime Minister Yulia Timoshenko 

signed a memorandum on the future cooperation between the two countries in the gas sphere. The memorandum provided for a gradual increase in import 

prices and transit tariffs, recognized the necessity to 

ensure uninterrupted gas transit through Ukraine, 

designated Naftogaz as the monopoly importer of 

Russian gas to Ukraine, and provided for joint Russian-Ukrainian gas exports to Europe. 

Two weeks later, the chief executive officers 

(CEOs) of Gazprom and Naftogaz, Alexey Miller and 

Oleg Dubyna, signed another agreement. Among 

other things, it foresaw a gas contract to be signed in 

November 2008 and specified the guarantee of unin-
32

terrupted gas transit by Naftogaz at a minimum of 

120-bcm per year. However, Gazprom and Naftogaz 

failed to reach an agreement on the import price from 

January 2009 onwards. Ukraine was unwilling to 

agree on a new, higher price as Naftogaz still owed 

Gazprom considerable sums of money for Gazprom’s 

previous gas deliveries. By the middle of December 

2008, Naftogaz had paid only $800 million of an accumulated $2.2 billion debt. Moreover, Naftogaz rejected Gazprom’s offer to pay for its transit in advance 

and thus provide Naftogaz with enough resources to 

pay its gas debts.

In November 2008, Alexey Miller said that, if the 

parties do not sign a new supply contract by the end 

of the year, the price for Ukraine from January 2009 

onwards would be $400 per 1,000 cubic meters. Putin 

added that, if the contract was not signed, supplies 

to Ukraine would end. The EU did not take an active 

position at that time. The EU’s only response to these 

warnings was a press release in which it called upon 

the parties to adhere to the principle of uninterrupted 

transit. On December 31, 2008, Naftogaz allegedly 

informed Gazprom that if Gazprom sent transit gas 

through Ukraine, this gas would be confiscated by 

Ukraine. On January 1, 2009, Gazprom cut all supplies 

to Ukraine, while it continued to pump the transit gas 

for the EU customers into the Ukrainian network. On 

January 4, 2009, Gazprom accused Ukraine of allegedly having stolen 50 million cubic meters (mcm) of 

gas, which did not belong to Naftogaz, from the gas 

stream intended for the EU and from the underground 

reservoirs. 

On January 5, the amount of allegedly syphoned 

gas rose to 63-mcm. Naftogaz claimed that around 25-

mcm was necessary to operate the pipeline network in 
33

the conditions of a lower gas pressure from Russia, and 

that it was “entitled” to take that volume out of the European transit volumes. On January 5, Putin and Miller 

decided to cut the gas supplies to Ukraine entirely. On 

January 6, Gazprom significantly reduced its supplies 

and on January 7, the company cut off the supplies 

completely.

Only at that point did the EU take action. It put 

together a monitoring mission composed of representatives of both sides to the dispute, as well as of the EU 

itself and European gas companies. The monitoring 

mission was deployed on January 11-12, 2009. Mutual 

accusations between Russia and Ukraine of being responsible for the gas deliveries cut off continued. Gazprom claimed it was willing to ship gas to Ukraine, 

but Naftogaz blocked Gazprom’s attempts. Naftogaz 

claimed that no gas was being shipped. European gas 

companies started pressuring Gazprom for a resolution of the dispute. On January 19, 2009, Gazprom and 

Naftogaz signed two new contracts—one on the supply and one on the transit of gas. Gazprom resumed 

its gas shipments on January 20, 2009, and by January 

22, the shipments reached their original levels. Russia and Ukraine agreed on a base price of $450 per 

1,000 cubic meters, which was subsequently lowered 

to $360 by a 20 percent discount.65 This discount was 

officially explained by the fact that, despite raising 

the price by Gazprom, the transit price Gazprom was 

charged by Naftogaz for transiting through Ukraine’s 

territory was left unchanged at its 2008 level—$1.7 per 

1,000 cubic meters of gas per 100-km. However, the 

real reason behind this scheme (a high base price lowered by means of a discount) may have been different. It provided Russia with maneuvering space and 

allowed it to manipulate the price without breaching 
34

the contract. In particular, Gazprom was not legally 

tied to the price of $360 per 1,000-m3, and could flexibly and arbitrarily raise it in case the Kremlin saw a 

need to put the Ukrainian government under more 

pressure.

This dispute seriously shattered the reliability of 

Russia as a stable and predictable gas supplier and 

served as an incentive for the EU countries to look for 

alternatives. Before the dispute, there were discussions in the EU about potential diversification, but not 

much had been done in this regard.

Gas Dispute of 2014.

The 2009 gas crisis, which resulted in a gas contract 

between Russia and Ukraine, created a potential for a 

new gas conflict to emerge later. The 2009 gas contract 

foresaw a price for Ukraine of $450 per 1,000 cubic 

meters, which was comparable to how much the EU 

countries paid. However, Ukraine, with its obsolete 

and inefficient gas transit network and retail gas price 

subsidies, simply could not afford to pay such high 

prices to Gazprom. Therefore, the country continued accumulating debt and gave Russia a new lever 

in their uneven relationship. During the Yanukovich 

rule and even beyond, the greed of the oligarchs who 

controlled gas purchase and distribution has prevented serious reforms from taking place. Brussels and 

Berlin, Germany, have not prioritized the reduction of 

their own Russian gas consumption and would not—

or could not—force Kyiv to cut its dependence on this 

energy source either.

The 2014 gas crisis between Russia and Ukraine 

began in late-2013 against the background of the popular uprising against the Yanukovich rule, supported 
35

by the oligarchs. Putin went out of his way to convince Yanukovich not to sign the Association Agreement with the EU, which the Ukrainian leader had 

earlier promised to sign. Moscow also did its best to 

pave the way for Yanukovich to bring Ukraine into 

the Russian-led Eurasian Union. 

On December 17, 2013, Putin and Yanukovich 

reached a deal, according to which Russia would provide Ukraine a loan of $15 billion and would offer 

the country a discount on Russian gas.66 The meeting 

between the two presidents took place after the “unexpected” decision by Yanukovich to postpone the 

integration of Ukraine with the EU and not to sign the 

Association Agreement and the Deep and Comprehensive Free Trade Agreement (DCFTA) with the EU 

at the Vilnius Summit in late-November 2013. After 

this decision led to outrage among pro-Western Ukrainians, who most likely looked to the EU integration as 

a way to overcome their Soviet past once and for all, 

Russia tried to soothe the anger by offering Ukraine 

something the EU could not give Kyiv—easy money 

and cheap gas.

In December 2013, Gazprom and Naftogaz signed 

amendments to the 2009 gas contract, where the price 

of the Russian gas for Ukraine would fall from around 

$400 per 1,000 cubic meters to $268.5. This step was 

meant to be a “temporary” solution. A final solution 

on the price and on the way of ensuring the security 

of transit of the Russian gas to the EU was to be found 

later. The high price of $400 per 1,000 cubic meters 

had been dreaded by Ukraine and was one of the excuses to jail Timoshenko, who signed the original 2009 

contract with Putin on behalf of Ukraine. In exchange 

for Russia lowering the price by almost 33 percent, 

Ukraine officially did not have to make any conces-
36

sions. However, the subsequent actions of the Ukrainian government, led by Prime Minister Nikolay Azarov, suggested that Yanukovich’s promise to merely 

“postpone” the European integration process instead 

of openly reversing it was only an attempt to appease 

the public, calm down the protesters, and buy time. 

Although it was never publically announced, there 

are reasons to believe that, in exchange for cheaper 

gas, Yanukovich agreed to forego the original Ukrainian plans to sign the Association Agreement with 

the EU.67

A turning point came when Yanukovich was ousted by the EuroMaidan protesters in February 2014. 

With Yanukovich gone, Russia lost an incentive to 

subsidize Kyiv’s loyalty to the Kremlin with cheap 

gas. In March 2014, Gazprom started making warning 

comments that the gas discount might be abolished. 

The warnings materialized on April 1, 2014, when 

Gazprom announced that it increased the gas price for 

Ukraine to $385.5 per 1,000 cubic meters.68 This was a 

$117 (or 43.5 percent) increase compared to the 2013 

price of $268.50 agreed to by Putin and Yanukovich. 

The official reason for the price increase was the high 

debt of Naftogaz to Gazprom. As of early-April 2014, 

the debt Naftogaz owed to Gazprom was estimated to 

amount to more than $2.2 billion.69

In early-March 2014, Naftogaz announced that it 

had paid for the Russian gas received in January and 

promised to pay for the gas received in February in 

due course.70 By April 7, 2014, Ukraine was supposed 

to pay its gas debt of $2.2 billion, which Naftogaz 

failed to do.71 The easiest short-term solution would 

have been for Russia to provide Ukraine with a loan of 

$2 to $3 billion. However, this was out of the question 

because Russia did not recognize the then-leadership 
37

of Ukraine (between February and May 2014) as legitimate. Moscow claimed that Prime Minister Arseniy 

Yatsenyuk and The Verkhovna Rada Speaker Arsen 

Avakov did not assume power in Kyiv based on any 

legitimate expression of will of the Ukrainian nation. 

Trilateral gas talks between the EU, Ukraine, and Russia during the period from April to mid-June 2014 

turned out to be fruitless. Russia agreed to lower the 

initially proposed price for Ukraine to $385 per 1,000 

cubic meters by adjusting its federal gas export tariffs, 

but Ukraine insisted on a price of $320. The gas talks 

were excruciating. In May 2014, Ukraine and Europe 

feared that, if Ukraine did not pay its debt as demanded by Gazprom, Russia might turn off gas on June 3. 

On May 1, 2014, the retail gas prices for the Ukrainian consumers increased by around 50 percent.72 The 

lowest tariff for households rose to $95.5 for 1,000 cubic meters of gas, which is still well below the wholesale prices Ukraine pays Russia, as the retail gas prices 

for households is heavily subsidized. The maximum 

retail gas price that gas distribution companies were 

allowed to charge increased to $414.02 at the then exchange rate, excluding the value-added tax (VAT) and 

other taxes. On April 1, 2015, the retail prices of natural gas for households went up again by another 285 

percent on average.73 Wholesale gas prices for industrial consumers went up also, although not as sharply. 

Higher natural gas prices also increased the Ukrainian 

consumers’ bills for electricity and hot water. These 

price increases were not final. Raising the price of electricity and the phasing out of electricity subsidies are 

divided into five stages, with the last one ending in 

March 2017. Another round of talks between Russia, 

Ukraine, and the EU took place on May 26, 2014. 
38

The payment schedule that emerged as a result of 

the talks was that Naftogaz would pay Gazprom part 

of its gas debt. By May 29, 2014, Naftogaz was expected 

to pay $2 billion and an additional $500 million by June 

7, 2014. Gazprom warned Naftogas that, if Ukraine did 

not pay the June gas bill in advance by 10:00 AM on 

June 3, Gazprom would cut off gas to the country. On 

May 30, Ukraine announced that it had sent a payment 

to Gazprom covering part of the gas debt.74 However, 

Naftogaz paid only $786 million, instead of the $1.45 

billion demanded by Gazrom. Gazprom then initially postponed the deadline to June 9. This deadline 

was again postponed to June 10 and subsequently to 

June 16.75

On June 16, 2014, Gazprom introduced a regime 

of advance payments for gas in its transactions with 

Ukraine.76 In addition to that, Gazprom cut gas supplies for Ukrainian consumers and started shipping 

only the gas intended for transit to Europe via the 

Ukrainian gas network. However, Ukraine felt relatively confident about its own gas supply situation, 

because it had accumulated 15-bcm of gas in its underground reservoirs, which was estimated to be enough 

until October 2014. On October 2, 2014, the Russian 

Cabinet of Ministers adopted a decision which allowed Gazprom to subtract a sum owed to it by a foreign partner from potential payments Gazprom had 

to pay to that contractor for gas transit.77 In particular, 

this decision applied to Naftogaz. The Russian decision allowed Gazprom not to pay Naftogaz for gas 

transit to the EU and to lower the debt of Naftogaz by 

the sum of the required transit payments.

In early-October 2014, Yatsenyuk stated that 

Ukraine was considering two potential options for 

its next steps in the gas issue.78 The first one was to 
39

try to reach a deal on an acceptable price with Russia, together with EU backing. If this strategy did 

not work, Ukraine planned to demand an interim 

court decision, which would set the price and other 

conditions of Russian gas supplies to Ukraine until 

a final verdict was reached by the Stockholm arbitration court. On October 14, 2014, Naftogaz filed a suit 

against Gazprom in order to claim compensation for 

the allegedly insufficient transit volumes, which led to 

lower transit revenues for Naftogaz than anticipated.79

Naftogaz demanded in court to either amend or cancel those provisions of its contract with Gazprom that 

were not being implemented by the latter. In particular, Naftogaz also demanded to change the system of 

the calculation of transit tariffs paid by Gazprom to 

Naftogaz, according to European norms. 

According to Naftogaz, the minimum volume of 

transited gas agreed upon in the contract was 110-

bcm per year. However, in 2012, the amount of transshipped gas was only 83-bcm, and in 2013, the amount 

was 86-bcm. Naftogaz proposed to follow the decision 

of the Ukrainian Cabinet of Ministers on the temporary method of transit tariff calculation adopted in 

compliance with the EU Directive No. 2009/73/EC on 

September 3, 2014. The document introduced separate 

tariffs for separate routes of the Russian gas in the 

Ukrainian gas grid in the form of both cash payments 

and extra free gas supplies.80 Naftogaz also proposed 

to adopt a new enhanced method as a basis for the 

calculation from the beginning of 2015.

On October 31, 2014, Russia, Ukraine, and the EU 

reached a deal on Russian gas supplies to Ukraine for 

the period until the end of March 2015.81 It took the 

parties seven rounds of talks and 5 months of negotiations to reach the deal.82 Kyiv agreed to the price 
40

of $385 per 1,000 cubic meters of gas, which was the 

price for winter gas supplies originally proposed by 

Kyiv in August 2014. Ukraine also agreed to pay for 

the gas deliveries in advance. In turn, Russia provided 

Ukraine with a $100 discount per 1,000 cubic meters 

by cutting Russia’s gas export tariffs. The deal provided a discount for Ukraine in exchange for paying off 

$5.3 billion of its overall gas debt to Gazprom. Russia 

also agreed not to implement Gazprom’s traditional 

take-or-pay principle banned by EU. Nevertheless, 

due to Ukraine’s financial crisis and cash shortages, 

the source of financial resources for Ukraine to pay 

further advance payments was not clear.

This deal seems to have been in the best interest of 

all three parties. Russia received at least some money 

from Ukraine, while Ukraine got the gas from Russia it 

badly needed. The EU, which worried mostly about a 

potential escalation of the gas conflict between Russia 

and Ukraine and subsequent disruptions of Russian 

gas supplies to the EU, got a guarantee of relatively 

safe gas deliveries, at least for the time being. The EU 

ended up playing a less important role in the deal than 

both Russia and Ukraine demanded. Initially, Ukraine 

requested that the EU keep an eye on the pricing, 

while Russia demanded that Brussels guarantee advance payments by Ukraine for the Russian gas. The 

EU accepted neither of these requests, but limited its 

role to an unspecified “contribution” to the deal itself.

Germany’s Angela Merkel and France’s Francois 

Holland have said that the EU would, together with 

the United States and the G7 (Canada, France, Germany, Italy, Japan, UK, and the United States), do 

everything it could to facilitate the implementation 

of the deal.83 The EU has been keeping that promise. 

In addition to the overall financial support of 1.61 bil-
41

lion Euros approved in 2010 and later in April 2014,84

Brussels approved one more package of aid for Kyiv 

for 1.82 billion Euros in late March 2015.85 As part of 

this approved package, the EU gave Ukraine a low 

interest rate loan of 250 million Euros in April 2015, 

aimed at stabilizing the Ukrainian economy and creating conditions for sustainable growth.86 However, this 

assistance is unlikely to stave off Ukraine’s default on 

the debt.

According to the October 2014 deal, Naftogaz was 

expected to pay $1.45 billion of its gas debt immediately after the end of the talks, while, by the end of 

2014, it should have paid Gazprom an additional $1.65 

billion. Thus, the overall debt repayment was agreed 

to reach $3.1 billion by the end of 2014. Naftogaz fulfilled its commitments. It paid Gazprom the first $1.45 

billion on November 4, 2014, and the remaining $1.65 

billion in late-December 2014.87 The overall size of the 

debt of $3.1 billion to be paid to Gazprom was based 

on the price of $268 per 1,000 cubic meters. On November 5, 2014, Ukraine also paid its first advance installment to Russia for $1.5 billion in order to ensure 

Russian gas supplies for the coming winter.

On November 10, 2014, Naftogaz accused Gazprom of failing to compensate Naftogaz for the gas 

transit for September and October. In principle, Gazprom was ready to pay for the transit, but wanted to 

calculate the transit price based on the price of $485 

per 1,000 cubic meters for Ukraine, whereas Ukraine 

wanted Gazprom to pay for the transit based on the 

price of $268. At first sight, the willingness of Gazprom to pay more than Naftogaz is ready to accept 

may seem counterintuitive. However, the reason for 

that is that both parties expect to use the final base 

price for the transit as an additional argument at the 
42

Stockholm arbitration court. Thus, according to Naftogaz, for September Gazprom was supposed to pay 

$64 million and for October another $88 million. Back 

in August 2014, Gazprom paid Naftogaz $10.54 million for transit because the original June 2013 advance 

payment for transit of $1 billion had run out. Gazprom 

argued that the original advance payment was based 

on the price of $400 per 1,000 cubic meters, while in 

the meantime Gazprom increased the price to $485. 

Naftogaz insisted that the transit payments should 

be calculated based on the price of $286 and returned 

the payment to Gazprom. From April to October 2014, 

Gazprom wanted to pay $360 million for transit while 

Naftogaz was willing to accept only $190 million.

On December 6, 2014, Naftogaz paid Gazprom 

$378 million for the 1-bcm of gas Naftogaz expected to 

receive in December.88 On December 8, Gazprom announced that it would restore gas supplies to Ukraine 

on December 11.89 Nevertheless, Gazprom renewed its 

gas supplies to Ukraine 2 days earlier, on December 

9.90 The announced daily volume of the gas supplies 

to Ukraine was 43.5-mcm.

Ukraine’s GDP is several times as energy intensive 

as the GDPs of advanced Organisation for Economic 

Co-operation and Development economies on average.91 Moreover, Ukraine is the most energy intensive country in the world.92 Energy loss in Ukraine’s 

heating systems is estimated to be around 65 percent, 

which is several times above the levels in advanced 

economies. This issue also contributes to the fact that 

the increase in Ukraine’s gas prices to $485.50 would 

have devastating effects for a range of heavy industries, such as metallurgy, vehicle manufacturing, and 

chemical industry, and may lead to their halt.
43

The 2014 gas dispute between the two countries 

has had several parallel conflicts within it. We will examine those one by one. The first conflict was the price 

dispute. Russia’s interest is to have the price as high as 

possible, while Ukraine’s interest is to have it as low 

as possible. While Russia lost its incentive to lower the 

gas price for Ukraine in exchange for the latter’s economic integration with the Eurasian Union, Ukraine 

kept insisting on a price substantially lower than what 

Gazprom was willing to offer.

The second dispute was about the gas transit price. 

Here, Russia was interested in paying more, while 

Ukraine insisted that Russia pay less. This logic, counterintuitive at first sight, is connected to the way of 

calculating the transit price, which is based on the 

price of gas for Naftogaz.

The third line conflict was a version of the takeor-pay principle, which in this case, relates to the 

amount of Russian gas transferred through Ukraine. 

The transfer contract between Gazprom and Naftogaz 

foresees a minimum amount of gas (110-bcm per year).

Gazprom has to ship that amount to Europe through 

Ukraine or, if the transferred amount of gas is lower, 

reimburse Naftogaz for the difference. However, after the Nord Stream came online in 2011, Ukraine’s 

significance as a transit country has declined. Moreover, Gazprom has expressed plans to bypass Ukraine 

completely in its gas deliveries to Europe starting in 

2019.93 This may lead to additional tensions regarding 

this minimum contract requirement for gas transfer 

through Ukraine.

The fourth conflict was about the unpaid debt of 

Naftogaz to Gazprom. Naftogaz blackmailed Gazprom by not paying its bills. Gazprom had a choice 

between the bad and the worse—between turning a 
44

blind eye on the debt of Naftogaz or cutting gas supplies to Naftogaz and, at the same time, cutting the 

supply to the EU. In this dispute, the EU served as 

Ukraine’s hostage, with little formal influence on either of the parties in the dispute. Due to the fighting 

and the high complexity of gas disputes between Russia and Ukraine, especially their 2014-15 iteration, it 

seems unlikely that Russian piped gas would become 

a predictable and reliable source of energy for Europe in the long run. The EU needs to do its best to 

diversify its sources of natural gas, and minimize the 

threat of becoming a hostage of a dispute it can barely 

influence.

Interconnectors for European Gas Transit. 

The Ukrainian crisis demonstrated that Europe is 

in a desperate need to improve security of its gas supply. This can be done through optimizing the natural 

gas pipelines on the continent and building interconnectors based on strategic demand. Since the 2009 crisis, there has been progress in connecting the Central 

European countries with gas pipelines that are able 

to transport gas in both directions. The Central European region, which depends the most on Russian gas, 

currently lacks a coherent north-south gas pipeline 

connection, which would run from Poland to Slovakia, Hungary, and Croatia. Such a connection would 

ensure flexibility of a bidirectional gas flow in case of 

need. This north-south route would connect the LNG 

terminals in Poland and Croatia. The Central European countries have made this project one of their priorities, and they plan to seek EU funds for its construction, which increases the likelihood of success.
45

In the meantime, in November 2014, Croatia renewed the project of construction of an LNG terminal 

on its island of Krk, which had been on the drawing 

board for around a decade.94 The terminal should cost 

around 600 million Euros and have a capacity of 4 to 

6-bcm of gas per year. If built, this LNG terminal will 

be useful not only for Croatia, which produces around 

60 percent of its gas needs domestically, but will also 

contribute to the energy security of Central Europe after the north-south route is constructed and launched.

The 2009 gas dispute between Russia and Ukraine 

incentivized Slovakia to ensure its ability to receive 

gas from Austria and the Czech Republic in case of a 

similar emergency. Slovakia and the Czech Republic 

made necessary improvements to the already existing 

pipeline interconnector between the two countries, 

which made it possible to supply gas from the Czech 

Republic to Slovakia. The reversible interconnector is 

capable of transporting up to 67-mcm/day of gas to 

Slovakia (24.5-bcm per year). Similarly, Slovakia built 

a small interconnector with Austria, which is capable 

of transporting up to 23-mcm/day of gas (8.4-bcm per 

year).95 Croatia and Hungary built the Városföld–Slobodnica pipeline, which became operational in August 2011.96 The pipeline can transport up to 7-bcm 

per year.

Initially, gas companies resisted such interconnectors, because they meant more choice for consumers 

and thus lower prices.97 The impetus for building the 

interconnectors was the Third Energy Package of the 

EU, and the growing concerns in the region about the 

reliability of Russia as a gas supplier. Thus, Poland 

has been connected with the Czech Republic since 

2011. Slovakia is constructing an interconnector with 

Poland and Hungary. Germany has been intercon-
46

nected with Italy, Poland, and the Czech Republic. 

The countries that are still critically lacking similar gas 

interconnectors are the Baltic States—Estonia, Latvia 

and Lithuania—which continue to depend on Russia 

for their gas supplies.

In late-March 2014, Slovakia and Hungary opened 

a gas interconnector between the two countries near 

the Hungarian village of Szada.98 This was an important moment mainly for Hungary, because the interconnector gives Hungary a possibility to receive nonRussian piped gas for the first time in its history. The 

pipeline cost 170 million Euros, out of which Slovakia 

paid around 21 million Euros, and was expected to be 

launched in a test mode on January 1, 2015.99 However, it did not become operational as planned because 

of technical problems on the Hungarian side, and 

the launch of the test phase was initially postponed 

to February 2015.100 At the time of this writing (June 

2015), the test phase was underway and was planned 

to be finished by the end of June 2015. The pipeline 

was planned to be launched commercially on July 1, 

2015.101

In late-October 2014, the Slovak wholesale gas 

operator Eustream submitted its first project, the construction of a gas interconnector with Poland.102 Construction of this interconnector will make it possible 

for Slovakia to import LNG from the Polish LNG terminal of Świnoujście, located on the coast of the Baltic 

Sea. The interconnector itself should be around 170-

km long and should run from the Polish gas hub in 

Strachocina (located in the southeastern tip of Poland) 

to the Slovak gas hub in Veľké Kapušany (located 

near the Slovak-Ukrainian border). The construction 

of the interconnector is planned for the years of 2018 

and 2019, and the pipeline should be launched in 
47

2020. However, even if these interconnectors were up 

and running, there is still the issue of where the gas 

would come from to fill these pipelines. It might actually come from Russia, including through the already 

operational Nord Stream, as the new EU legislation 

forbids destination clauses and thus denies Gazprom 

the ability to discriminate between client countries 

and companies. 

It is unclear whether there is a potential Southern 

route for the Russian gas after the demise of the South 

Stream Project. Russia would aspire now to supply 

Europe via the Turkish Stream project. Bypassing 

Ukraine would solve one challenge, the problem of 

Ukraine as a transit country, but would not solve the 

other problem—the unreliability of Russia as a predictable and transparent gas supplier that plays by 

EU current and future rules.

Wealth Transfer to Russia and Military 

Budget Funding.

Oil and gas revenue play a key role in Russian 

military modernization in general, and in the Ukrainian hostilities in particular. Military operations in 

the Crimea and Eastern Ukraine/Donbass suggest a 

higher level of operational competence, modernized 

weapons systems, better training, a more efficient 

supply chain, as well as better paid contract personnel and officer corps. This costs money, which comes 

from energy exports to Europe and elsewhere. Thus, 

the EU consumers of Russian oil and gas indirectly 

help finance this long-term and dangerous Russian 

military modernization, aggression, and annexation.
48

Russia continues to suffer from low competitiveness of its industrial base and the services sector, 

which leaves the country exporting mainly natural 

resources—oil and gas, other raw materials, and semifinished goods are the top currency earners. Russian 

exports also include weapons and nuclear reactors, 

relatively sophisticated items. Revenues from these 

exports make a significant share of Russia’s federal 

budget, which makes Russia particularly dependent 

on energy export revenues. The overall share of revenues from hydrocarbon exports in the Russian federal 

budget was just above 50 percent in 2013.103 In 2014, 

the number is expected to be 52 percent.

According to the Russian federal budget forecasts, 

the share of hydrocarbon revenues are expected to 

reach 7.7 trillion rubles (around $160 billion according to the November 2014 exchange rate) in 2015, and 

rise to 8 trillion rubles in 2016, and to 8.2 billion in 

2017.104 The Russian federal budget is expected to receive 51 percent of its revenues from hydrocarbons in 

2015, 50.8 percent in 2016, and 49.6 percent in 2017.105

This revenue is being used to finance the modernization of the Russian military. According to the Russian 

state program on modernization of the Russian armed 

forces in 2011–20, the federal government initially 

planned to spend around 19.6 trillion rubles106 (at the 

time, around $700 billion) on modernizing all branches of the Russian military—its strategic nuclear forces, 

submarines, fleet, air force, and army. 

Despite a series of lingering problems in the Russian military, such as poor morale of the conscripts, 

widespread harassment, and poor health of the soldiers, these investments are already making a difference in the overall strength of the Russian armed 

forces. Although this modernization of the Russian 
49

military is unlikely to pose a direct threat to the U.S. 

power projection beyond the Russian periphery, it 

has led to an increasingly assertive behavior of the 

Kremlin in the former Soviet Union countries, including the North Atlantic Treaty Organization (NATO) 

members, the Baltics, and across Western Europe and 

the Arctic. The crisis in Ukraine, including the Russian 

annexation of Crimea and the Russian-instigated, supported, and prosecuted war of secession in the Crimea 

and Eastern Ukraine, demonstrate this new assertiveness. Therefore, it is in U.S. and European interests to 

find ways of curbing the volume of the hydrocarbon 

revenues of the Russian federal budget in order to 

constrain the financing of the military modernization 

program and the neo-imperialist aspirations. 

Politically, the “guns or butter” choice is sensitive: As the Putin political regime is reliant on the 

so called byudzhetniki—people supported by federal 

budget transfers, such as the military, police, pensioners, teachers, and the vast, state-sector medical 

personnel—U.S. policymakers hoped the Kremlin 

might cut military expenses rather than curb social 

transfers. Russia has to be encouraged to face the unpalatable choice: gun or butter. So far, however, the 

choice Moscow has made was in favor of guns—with 

popular support. Alternatively, as they say in Russia, 

in the battle between the TV set and the refrigerator, 

the victory is that of the TV set.

Europe’s Reluctance to Sanction the Russian 

Energy Sector.

Although European imports of Russian gas earn 

Russia around $100 million per day, the EU has not 

used this Russian dependence on European gas mon-
50

ey as leverage in the current crisis in Ukraine. The 

EU sanctions towards Russia did not touch Russian 

energy exports, although financing and technology 

transfer to state-owned energy companies are the target of sanctions. The reason for this is the asymmetric 

mutual dependence of the EU and Russia regarding 

Russia’s gas exports to Europe. 

While the EU can exist without Russian gas only 

for several months, Russia can easily function without 

the income for the gas paid by the EU for at least 1 

year, possibly 2. If the EU decided to sanction Russia’s 

gas exports to Europe, it would hurt itself significantly more than it would hurt Russia in the short term. 

However, while the EU can find alternative sources of 

gas and reduce dependence on Russia, Moscow would 

have a very hard time replacing the vast European 

gas market for its West Siberian and Arctic supplies. 

Understanding this dynamic, the EU sanctioned the 

Russian energy industry, indirectly, through bans on 

acquiring sophisticated EU drilling technology and access to finance. Those European politicians, who realize the Russian threat to the continent’s security, hope 

that the Kremlin would be responsive to its economic 

pressure and moderate their policy, or members of the 

EU would find alternatives to Russian gas. So far, the 

Russian leadership has indicated that the Novorossiya

(Russian pseudo-historic name for Eastern and South 

Ukraine) may be winding down. However, there is 

scant evidence Russia has changed its policy based on 

economic pressure alone. More research is necessary 

to establish the relationship of economic, military, and 

internal/political factors in the Russian policymaking 

on the Ukraine conflict.
51

Price Formation for Different European Consumers 

as a Function of Their Dependence 

on Russian Gas.

One of the characteristic features of Russia as an 

energy supplier is the continuing use of the gas sales 

as a political lever. As noted earlier, Russia uses its 

gas monopoly power in parts of Europe in two ways: 

economic and political. The economic side is understandable—maximizing profits. However, Russia also 

often chooses to “reward” and “punish” its neighboring countries by setting a price that does not necessarily lead to the highest economic profits of Gazprom, 

but instead aims at reaching the political goals of the 

Kremlin in the respective countries. Thus, more Kremlin-friendly regimes, including those in Eastern and 

Central Europe, are rewarded with discounted gas 

prices, while those that want to distance themselves 

from Moscow pay as much as they can bear. The most 

notable example on the lower end is Belarus, which 

pays around $160 per 1,000 cubic meters. On the other 

side are the Baltic States, namely Estonia and Lithuania, which pay the highest wholesale gas prices in 

the EU (31.29 and 36.73 Euros per MWh respectively, 

which approximately corresponds to 330 Euros per 

1,000 cubic meters in the case of Estonia and 390 Euros 

in the case of Lithuania),107 negatively impacting the 

international competitiveness of these countries.

Moscow’s “Eastern Export Policy” to China 

and Its Limitations.

Russia is not just passively watching Europe trying 

to eliminate its role in supplying Europe with gas. It is 

actively looking for new markets. One of the few pos-
52

sibilities it seems to have is China. Russia has adopted a so-called “Eastern Export Policy.” In May 2014, 

Russia and China signed a deal which will bring gas 

from Eastern Siberia to China, supposedly by 2024, 

which was dubbed the “deal of the century.”108 Under 

the deal, Russia will supply 38-bcm of gas to China 

annually through the Power of Siberia pipeline. According to unofficial sources, the agreed price is about 

$350 per 1,000 cubic meters, which was less that the 

EU countries were paying at the time. In addition, 

Russia will bear the costs of developing the fields and 

building the pipelines to the Chinese border, and the 

price for the gas for the 30-year contract period will be 

fixed. While many details of the deal are secret, many 

experts suggested that this policy would not lead to 

an increase of Gazprom’s profits. Instead, it is viewed 

more as a kind of market diversification and an insurance against European attempts to shatter the Russian 

gas yoke. Nevertheless, the diversification will not 

happen until the beginning of the next decade due to 

the need to develop the gas fields that Russia is planning to use as a source of the gas pipelined to China.

Russia and China are now considering adding the 

Western export route capacity to 100-mcm per annum 

(the Altay pipeline from Western Siberia). However, 

the China market does not seem to be a lucrative alternative to European consumers due to the lower 

premiums Gazprom will be able to charge. Increasing 

the share of gas in its energy mix would undoubtedly 

benefit China, which now uses mostly coal for its industries, heavily polluting its environment. In addition, China revised its potential for shale gas production downwards,109 which will most likely give Beijing 

additional incentives to be more willing to strike a gas 

deal with Russia. Pipelined gas would most likely be 
53

cheaper than the LNG Asia imported until late-2014 

for significantly higher prices than the rest of the 

world. However, one of the key aspects of the Altay 

pipeline—the price—is not yet agreed upon, and, in 

view of the natural gas price collapse, is likely to continue to be negotiated between Moscow and Beijing.

In addition, Kazakhstan came up with an initiative to build a pipeline from Russia’s Western Siberia to China through its territory.110 If built, this new 

route could become an alternative to the Altay pipeline, which was a target of objections from the United 

Nations Educational, Scientific, and Cultural Organization. Alexander Sobyanin, Head of the Strategic 

Planning Service of the Association of Trans-border 

Cooperation, said that Kazakhstan is a natural route 

for such a pipeline from Western Siberia. Russia and 

Kazakhstan are de facto allies as members of the Eurasian Economic Union (EEU), CIS, and Collective 

Security Treaty Organization. 

In the 1990s, Kazakhstan pursued a multivector 

foreign policy, which caused a certain degree of suspicion from Moscow. That has changed, and for the 

past couple of years, Kazakhstan has been firmly participating in the Moscow-dominated Customs Union 

and the EEU. The challenge for Russia can be in the 

fact that Kazakhstan wants its gas fields to contribute 

to the pipeline as well, which means that Russia may 

end up selling less gas and getting less cash for the gas 

transported through the pipeline than it would if the 

pipeline transferred only Russian gas. If Russia blocks 

sales of Kazakhstani gas to China, Astana might decide to sell it to Europe, further weakening Europe’s 

dependence on Russian gas.
54

IMPACT OF THE UKRAINIAN CONFLICT AND 

THE EUROPEAN RESPONSE

Emergency Gas Plan Drafted by the

EU Commission.

Russian gas dependence may threaten Europe if 

Moscow decides to temporarily or permanently cut 

the supply to its customers. The EU temporarily could 

pursue several policies in case a shortage of Russian 

gas develops.111 Limitations on consumption can only 

go so far and have a high economic cost. For instance, 

EU could ban gas exports beyond its borders and limit 

the amount of gas intended for industrial use as part 

of emergency measures to protect household energy 

supplies in the winter months. 

One of the measures may thus be banning a socalled reselling of imported gas to third countries. In 

2010, the EU passed a regulation (994/2010) adopted 

after the 2009 gas dispute between Russia and Ukraine 

that protects European gas supplies.112 The regulation 

obliges the EU member states to establish a Preventive Action Plan and an Emergency Plan. The Preventive Action Plan contains the identified risks of each 

member state’s gas supply and proposed measures 

to mitigate those risks. While such measures would 

inevitably hurt the European economy, they would 

make sure that households do not freeze in the winter 

months. Second, as large enterprises do not have supply priority, these would get disconnected in order to 

make enough gas available for households.

The Emergency Plan contains the measures aimed 

at mitigating the impact of a disruption in supply after it occurs. The regulation also provides for deadlines and rules of building reversible, bidirectional 
55

interconnectors between the member states, which is 

being done at the time of this writing. It also defines 

households as “protected customers” and obliges the 

member states to ensure gas supplies to these customers as a priority in case of gas supply disruptions. In 

practice, this regulation means that it is a part of a 

so-called “Plan B,” prepared by the European Commission. In addition, the EU countries have been preparing for a possible disruption by pumping more gas 

into their underground reservoirs. In August 2014, 

Europe had 16.52-bcm (31.2 percent) more gas in its 

reservoirs compared to the same month of 2013. 

In August 2014, both Ukraine and Russia added 

tension to the issue of the security of the Russian gas 

supply for the near term. In late August, Ukrainian 

Prime Minister Yatsenyuk said he knew about Russian plans to cut off gas to the EU during the 2014-15 

winter.113 Alexander Novak, Russia’s energy minister, who called Yatsenyuk’s comment a “groundless 

attempt to intentionally mislead or misinform European consumers of Russian gas,” promptly denied 

these claims. As further developments demonstrated, 

Russia has not stopped the flow of gas.

Problems of the Reverse Flow of Gas 

from the EU to Ukraine.

In the summer of 2014, Ukraine was unwilling to 

bow to Russian demands to pay billions of U.S. dollars for gas it owed to Gazprom, and Moscow clearly warned Kyiv that it would cut off its supplies to 

Ukraine in case it does not pay back its debt. To find 

a way out, Ukraine approached the EU with the proposal to organize “reverse” gas flows from the EU 

to Ukraine. The reverse flow of gas would use the 
56

existing pipelines, while the direction of the gas flow 

would be reversed: Russian gas would flow from the 

EU to Ukraine. Three EU countries bordering Ukraine 

became the main partners of Ukraine in this project—

Poland, Slovakia and Hungary. All three of them successfully organized the reverse flow, but in none of 

these three countries was the reverse flow without 

issues.

Poland.

Poland is capable of generating a reverse gas flow 

to Ukraine of up to four million cubic meters per day. 

However, on September 10, 2014, Poland stopped 

supplying gas to Ukraine. The reason was that Russia 

lowered its own supplies of gas to Poland through Belarus and Ukraine, which in turn forced the Polish gas 

operator, Polish Petroleum and Gas Mining (PGNiG), 

to cut off its exports of gas to Ukraine. The decrease of 

Russian supplies was gradual, initially going down by 

20 percent and dropping to a level 45 percent below 

the usual volume.114 However, 2 days later, on September 12, 2014, Poland restored the original level of 

its gas supplies to Ukraine due to the fact that it found 

alternative sources of gas, namely Germany and the 

Czech Republic, which were able to compensate the 

decrease in Russian gas supplies.

Slovakia.

Before the beginning of the reverse flow of gas 

from Slovakia to Ukraine, there were two options: a 

so-called “small reverse” (supplies of around 8 to 10-

bcm per year) or a so-called “big reverse” (supplies 

of around 30-bcm per year). The “big reverse” would 
57

have used one of the pipelines Gazprom uses to pump 

gas to Slovakia from Ukraine. The “small reverse” 

was expected to take advantage of an unused small 

pipeline between the Slovak Village of Vojany on the 

Slovak-Ukraine border and the Ukrainian town of 

Uzhhorod on the other side of the border.

Initially, Ukraine pushed for the “big reverse,” 

which would be able to supply the country with much 

more gas, while Slovakia wanted the “small reverse.”115

The option considered for the “big reverse” was a socalled virtual reverse flow of gas, which would mean 

that the Russian gas intended for Slovakia physically 

would remain in Ukraine, but Slovakia would pay 

Gazprom as if the gas was delivered physically to the 

Slovak gas network. The Slovak government refused 

this idea, because, according to the legal opinion it 

received, Slovakia might breach its agreements with 

Gazprom. According to the contract, the gas was Gazprom’s property until it crossed the Slovak-Ukrainian border. In addition to that, this option would be 

technically difficult to implement. Therefore, Slovakia 

insisted on the “small reverse.”

However, in order to make the “small reverse” flow 

realizable, a special measuring facility had to be constructed in the village of Vojany. Disputes over who 

would pay for the construction of the facility emerged. 

The Ukrainian side demanded the Slovak government 

build and finance the facility entirely. Slovakia agreed 

to finance the construction of the necessary facility in 

Vojany in full, which cost around 20 million Euros. 

The Slovak government agreed to build the measuring facility, even though there were no guarantees 

that they would ever profit from this investment. 

Brussels refused to guarantee to compensate the Slovak government in case of losses.116 Nevertheless, on 
58

April 28, 2014, the Ukrainian and the Slovak governments signed a memorandum.117 Despite the required 

investment to build the necessary infrastructure in the 

eastern part of the country on its own, the reverse flow 

of gas from Slovakia to Ukraine is also in the Slovak 

economic interest, as the gas suppliers now are paid 

for the reverse transit, which is expected to compensate the Slovak suppliers for their initial investment 

into the infrastructure.

Initially, Gazprom tried to prevent the reverse 

flow of gas from Slovakia to Ukraine from happening. 

Gazprom’s CEO Alexey Miller said that those countries which agreed to supply Ukraine with the reverse 

flow of gas, would face lower supplies from Russia. 

Although it indeed happened later, allegedly for technical reasons, this threat did not prevent Slovakia and 

its neighbors from going ahead with the reverse flow. 

The real reasons for the temporary decrease of Russian gas supplies to Slovakia, as well as to Poland, 

are not fully known. It might have been an attempt 

of Gazprom to exploit the potential sense of vulnerability in Slovakia and Poland to gas cut-offs. It might 

have been a warning signal to Europe that Gazprom 

indeed was prepared to use the mutual “asymmetric” gas dependency of Europe and Russia to its own 

advantage,118 but chose not to do so.

On September 2, 2014, the Slovak gas operator Eustream started supplying Ukraine with gas through 

the Vojany–Uzhhorod pipeline.119 According to Yatsenyuk, the reverse flow of gas from Slovakia should 

compensate around 40 percent of the gas Ukraine 

used to get from Russia. According to the deal between the Slovak and the Ukrainian governments, 

Slovakia committed to supply Ukraine with gas until 

2019.120 On September 10, 2014, Slovak gas distributor 
59

Slovensky Plynarensky Priemysel (SPP) announced 

a decrease in the volume of gas supplies to Slovakia 

from Russia through Ukraine by 10 percent. However, 

this disruption was only temporary. It did not cause 

much tension and did not influence the reverse gas 

flow to Ukraine. Initially, the agreed volume of the 

reverse flow of gas from Slovakia to Ukraine was 27-

mcm per day (10-bcm per year).121 However, by March 

2015, this volume was increased to 40-mcm per day 

(14.6-bcm per year), which is the largest volume of gas 

supplied to Ukraine from the West.122

Hungary.

Initially, Hungary was among the three countries 

that allowed the reversed flow of natural gas from 

the EU to Ukraine. On April 8, 2014, Hungary stated 

that, in the event excess supplies were available, it 

was ready to ship up to 6-bcm of gas to Ukraine per 

year. The maximum capacity of the pipeline through 

which the reverse flow was to be implemented determined this limitation. However, the reverse gas flow 

from Hungary did not last for long. In July 2014, Hungary lowered the amounts it was pumping to Ukraine 

within the reverse flow of gas due to its need to fill 

its own underground gas reservoirs in order to prepare for winter.123 The daily amount of gas pumped 

to these reservoirs amounted to around 20-mcm per 

day, compared to around 10 million per day in June. 

At that time, Hungary was the least prepared for winter among the countries in the region.

On September 25, 2014, Hungarian gas operator Foldgazszallito (FGSZ) announced that it fully 

stopped the reverse flow of gas from Hungary to 

Ukraine.124 Although FGSZ announced that cutting off 
60

gas supplies from Hungary to Ukraine was necessary 

due to an increased domestic gas demand, this step 

was made only several days after Gazprom’s CEO 

Miller visited Hungary. Therefore, Naftogaz believes 

that the decision was political, instead of technical.125

EUROPE’S ALTERNATIVES TO RUSSIAN GAS 

AND THEIR ISSUES

Shale Gas and the Issues Associated with It.

General Shale Gas Considerations in the EU and Fear of 

Hydraulic Fracturing.

The main problems for the EU when it comes to 

developing its own shale gas resources are the lack 

of natural resources legislation which would provide 

ownership of the mineral rights to land owners who 

lease the land to hydrocarbon exploration and production companies. In addition, Europe has higher 

population density, which results in heightened environmental sensitivity and limitations in comparison 

with the United States. Furthermore, it suffers from 

the lack of public understanding of and education 

about shale gas production and hydraulic fracturing 

safety, from a scarcity of energy firms with proper expertise, and from a shortage of drilling equipment and 

trained personnel.126 Current estimates also show that 

the EU shale gas, if it is developed commercially, will 

likely be more expensive than in the United States.

A major concern in the EU is the potential influence of the shale gas development on the safety and 

quality of underground freshwater reservoirs. The 

shale gas development is feared to result in freshwater 

shortages in the areas of its development, and to cause 
61

freshwater, soil, and other environmental contamination and pollution. Hydraulic fracturing (fracking) is 

alleged to produce aromatic compounds such as benzene and xylene, which allegedly has been the case in 

Texas.127 Fracking requires large amounts of water in 

order to lubricate the drilling heads, remove the drilling mud, and to create the cracks in the shale in order 

for the gas to flow out. Oil and gas exploration and 

production—not just fracking—reportedly caused 

water contamination by methane and other substances; from spills of drilling mud, flowback, and brine; 

and through either natural geological cracks or manmade pathways caused by inadequate handling, old 

equipment, and inadequate cementing of the wells.

The third set of issues are those related to nonmaterial aspects: visual landscape disturbance, impact on 

biodiversity, increased noise levels, and seismic concerns. While these factors are difficult to measure, they 

lead to opposition towards building shale gas wells 

by the locals—the NIMBY approach. In particular, a 

2011 report published by the European Commission128

identifies the following risks of fracking, which is the 

key part of the entire process of extracting shale gas: 

consumption of landscape, air and noise pollution, 

contamination of water with chemicals, earthquakes, 

mobilization of radioactive particles from the underground geological strata, and the impact on biodiversity. The paper further argues that it might be more 

efficient to build a solar power plant instead, because 

this solar power plant would be able to generate more 

electricity than the gas extracted from the same area 

would be able to generate. The conclusion of this report looks dubious, as the solar-sourced electricity is 

still riddled with problems of cost and intermittency 

that are too numerous to address here. This may 

change in the future when the technology matures.
62

France: Nuclear Lobby Opposes Shale Gas.

In France, the shale gas faces a relatively strong 

opposition from environmental organizations and 

the general public opinion.129 One of the problems in 

France is that the shale gas reserves are located close 

to the populated areas.130 There were mass protests all 

across France to prohibit fracking after it became clear 

that the French government gave its consent for fracking to energy companies. This was a failure of public 

education, which responsible governments as well as 

energy companies need to undertake when dealing 

with disruptive technologies. 

On May 11, 2011, the French parliament voted for 

a ban on producing shale gas in France. The ban entered into force on July 1, 2011, and included fracking for research purposes. However, this law does 

not prohibit the production of shale gas itself. It only 

prohibits fracking operations. Since fracking is the key 

component of shale gas production, this ban de facto 

prevents shale gas extraction. On October 23, 2011, 

France revoked the license for Total, which had been 

granted the right to explore the area of Montelimar 

(southern France) with an area of 4,327 square km.131

Clearly, shale gas production would endanger the 

already-embattled French nuclear power industry. It 

is not clear in what way the powerful nuclear lobby 

has intervened to stop fracking, yet conversations 

with French experts and lobbyists have suggested that 

this is likely the case. 
63

Poland: Shale Mismanagement.

Initially, Poland went through euphoria when reports appeared that there are shale gas reserves in its 

territory, which would significantly reduce the country’s dependence on Russian gas.132 In 2011, the U.S. 

Energy Information Administration estimated the volume of recoverable Polish shale gas at 5.3 trillion cubic 

meters (tcm), which would be enough to satisfy the 

domestic Polish consumption for around 300 years, 

given the then consumption rate of gas in Poland. 

However, according to a more conservative estimate 

of the Polish Geological Institute, the amount of shale 

gas in the Baltic-Podlasie-Lublin Basin is estimated to 

be only between 346.1 and 767.9-bcm.133 This euphoria was later cooled down due to two reasons: geology 

and politics. First, the geology of the shale gas areas 

turned out to be more difficult than previously anticipated. Second, the Polish government mismanaged 

the exploration and production process for shale. Foreign energy companies considered the government’s 

demands for control over the revenues, exploration, 

and production excessive.134 The Polish government 

granted exploration licenses with too short of a term 

to allow for profitable development of shale gas fields. 

The government also proposed a 40 percent tax on 

the profits of Polish shale gas operators and producers. This complex geology and overly tight regulatory 

framework of the Polish government, plus the threat 

of high taxes and lower profits for the foreign energy companies, was the main reason foreign energy 

companies abandoned exploration and production of 

shale gas in Poland.

The Polish government gave lesser weight to the 

environmental concerns about the shale gas pro-
64

duction in comparison with its Western European 

counterparts. To the contrary, the Polish government 

hoped that shale gas would help the country reduce 

its greenhouse emissions by replacing its environmentally problematic coal-fired power plants with electric 

power stations run on shale gas, especially under the 

pressure from Brussels to reduce its high greenhouse 

emissions. However, the exploration did not go as 

planned. Companies such as ExxonMobil quit Poland 

in 2012 after exploratory drilling wells produced unsatisfactory results,135 followed by Talisman and Marathon Oil exiting the country in 2013.136 On February 

9, 2011, the Polish Geological Institute (PGI) reacted 

to the news reports on the unprofitability of shale gas 

production in Poland by simply stating that the future 

probability of shale gas production could not be predicted.137 There was no economic analysis of the profitability of unconventional gas exploration. Therefore, 

according to the PGI, as the geological parameters of 

shale gas deposits were still unknown, it was premature to draw any conclusion about the unprofitability 

of such production.

Most of the Polish public opinion supports its government’s strong desire to develop Polish shale gas 

resources. According to an opinion poll conducted 

in late-2011, 73 percent of Poles supported developing shale gas, while only 4 percent opposed it. One of 

the main reasons behind such a strong Polish support 

for shale gas seems to be the weak position of antishale gas environmentalists in Central Europe.138 This 

contrasts with Western Europe, where environmental 

activists were able to convince the population about 

their cause. Since 2011, Poland’s ambitious desire to 

develop its own shale gas fields in order to break free 

from its gas dependence on Russia, combined with 
65

low transparency in its public sector, has involved 

the country in two disputes with the EU authorities. 

First, in 2013, Poland got into a dispute with the EU 

about the legality of the shale gas exploration concessions granted to energy firms without a transparent 

bidding process. In June 2013, the European Court of 

Justice ruled that Poland violated the EU’s Hydrocarbon Directive. This decision forced Poland to amend 

its laws, which in turn made the process of granting licenses more transparent and fair on one hand, but less 

flexible on the other.

In June 2014, Poland got into another dispute with 

the European Commission about the compliance with 

the EU Environmental Impact Assessment (EIA) Directive.139 The European Commission sent a formal 

notice to Warsaw that it was opening a case against it 

for infringing the EIA Directive. Poland infringed the 

directive by adopting a law that allowed shale gas development from fields up to 5-km below the surface. 

The Poles did not require reports assessing possible 

environmental impact.140

As of December 1, 2014, the Polish government 

had issued 56 licenses to energy companies for shale 

gas exploration, including Chevron Corporation (four 

licenses), PGNiG S.A. (12 licenses), and Polski Koncern Naftowy Orlen S.A. (nine licenses).141 However, 

the Polish minister of environment said that it might 

take Poland several years to assess the economic viability of its shale gas reserves properly.142 The gas is 

there, but its profitability remains in question. As of 

now, it is unclear whether the initial Polish euphoria 

about its shale gas will materialize into developing 

meaningful and commercially viable amounts of gas, 

which would be able to influence the Polish-Russian 

gas relations materially.
66

Romania: Unexplored Potential.

Romania has relatively large domestic supplies 

of gas, which it used during the 2009 supply crisis to 

make up for the decline in the Russian gas flow. Romania has the second highest amount of conventional 

gas reserves in the EU (around 630-bcm), after the 

Netherlands.143 It is the fourth largest gas producer in 

the EU after the UK, the Netherlands, and Germany. 

Romania might even export its gas from its Black Sea 

continental shelf through Hungary to Austria by the 

end of the decade.144 This would require construction 

of a large east-west pipeline from Romania through 

Hungary, by Hungarian national gas operator FGSZ. 

According to FGSZ, the volumes of the gas supplied 

by Romania would range between 1.5-bcm per year to 

as much as 10-bcm per year—an optimistic expectation. The pipeline would provide better energy security for western Hungary, which is the main priority of 

the pipeline, as well as diversify European gas supply.

When it comes to shale gas production, the stance 

of the Romanian government over the past several 

years has evolved. In 2012, the center-right government took a rather favorable position towards this issue. The left-wing opposition rejected the idea and in 

May 2012, introduced a ban on any future shale gas 

exploration after the left took power. In November 

2014, Romanian Prime Minister Viktor Ponta said that 

Romania does not have shale gas it could produce.145

This statement is baffling, as companies have not 

undertaken proper exploration, and raises questions 

about Ponta’s real agenda. 
67

Ukraine: The War Derails the Unrealized Gas Potential.

Ukraine currently produces around 20-bcm of gas 

per year. After Ukraine lost Crimea in March 2014 to 

Russian invasion, occupation, and annexation, no increase in production of gas is expected in Ukraine for 

2014-15.146 In the first half of 2014, Ukraine produced 

9.8-bcm, while the demand for gas was 24.6-bcm. 

In the past, there was much optimism concerning 

gas production. According to statements made by 

Yanukovich in 2013, by 2020 Ukraine should become 

completely independent in terms of gas, and, according to the optimistic scenario, it should become a gas 

exporting country.147 The Ukrainian leadership, however, has so far failed to diversify sources of natural 

gas for their country. In May 2013, the Yanukovich 

presidency announced that the country should receive 

the first shipment of LNG as early as the last quarter 

of 2014.148 This was unrealistic, as the administration 

of Ukrainian President Petro Poroshenko and Prime 

Minister Yatsenyuk discovered in 2014-15. Turkey’s 

resistance to shipping LNG via Bosporus killed that 

project, due to safety concerns and Russian opposition 

to the shipments.

Many government officials and experts in Ukraine 

believe that shale gas in Ukraine is abundant, but 

exploration and production has been limited so far. 

Back in late-2013, local Ukrainian environmentalists 

were accused of playing into the hands of Russia in 

the local council of the Ivano-Frankovsk district. In 

addition, the radical nationalist Svoboda (Freedom) 

party organized street protests against the shale gas 

production. Nevertheless, the Ukrainian government 

approved the shale gas contract with Chevron in late 

October 2013.
68

The treatment of the would-be natural gas developers by the Ukrainian government is unfavorable. 

It mainly relates to the tax regime imposed by the 

government on energy producing firms, both domestic and foreign. In August 2014, Yatsenyuk’s cabinet 

introduced a 55 percent royalty tax on revenues of 

most gas producers.149 Initially described as a temporary measure, the Ukrainian parliament made the 

taxes permanent in December 2014.150 In particular, 

the 55-percent royalty tax applies to gas from sources 

up to 5-km below the surface, while gas drilled from 

fields deeper than 5-km (and, thus, with higher production costs) is taxed 20 percent. At the time of this 

writing (July 2015) a lower tax package is considered, 

however, the taxation targets production volume, not 

corporate profit, which is ill-advised. 

Thus, while the Poroshenko administration should 

be creating incentives for foreign energy firms to come 

to Ukraine, explore the opportunities, and drill for 

gas, the government is doing the exact opposite. The 

consequences may turn out to be disastrous. Without a significant capital investment in the gas sector 

in the near future, Ukraine will not only be unlikely 

to achieve energy independence from Russia anytime soon, but may even deepen its dependence and 

worsen its position vis-à-vis Gazprom.

Overall, more steps need to be taken to eliminate 

the deep-rooted Soviet legacy in Ukraine’s public service, including endemic corruption and incompetence 

of the government apparatus across the board, from 

the presidential administration to regular employees 

of the ministries and regional administrations. It appears far from certain whether Ukraine will be able to 

react swiftly to the mounting economic crisis. Ukraine 

currently needs liberalization, together with an anti-
69

crisis monetary policy; and a level, stable, and predictable playing ground for both domestic and foreign investors. Without such reforms, Ukraine is unlikely to 

be able to break free from its dependence on Russian 

gas and from the political diktat from Moscow.151

The policy of introducing high taxes for industries 

whose development is vital for the future well-being 

of the country is exactly the opposite of what should 

be taking place. Given the recent exodus of some 

foreign experts from high public service posts,152 the 

Ukrainian government ultimately is going against the 

country’s national interests. In fact, some compared 

Yatsenyuk’s current policies in the energy sector to 

Joseph Stalin’s steps to overturn the New Economic 

Policy in the early-1920s.153 Stalin’s tax and industrial policies threw the country into decades of agony, 

from which it has still not recovered, even after more 

than 2 decades after the fall of communism in Eastern 

Europe.

Geopolitics is taking its toll as well. To increase or at 

least maintain the current gas production levels prior 

to the war with Russia, Ukraine has relied mostly on 

the Black Sea and Azov Sea offshore areas for future 

gas production.154 These are the areas now controlled 

by the Russian military and populated predominantly 

by pro-Russian separatists.

Some of the conventional and shale gas fields are 

close to the Donetsk region—the heart of the proRussian separatist movement in eastern Ukraine. The 

Crimea itself produces between 1 and 2-bcm of gas per 

year, with additional off-shore fields planned to come 

online between 2016 and 2020, which now may be in 

doubt due to the occupation. When it comes to shale 

gas, Ukraine has the third largest gas reserves in Europe, behind France and Norway, amounting to 1.2-
70

tcm.155 Commercial shale gas production in Ukraine 

is expected to start in 2017. Ukraine’s partners for 

exploring and producing shale gas were Royal Dutch 

Shell and Chevron Corporation. 

The contract between Ukraine and Chevron has 

never been published. That has led to speculations 

about the real content of the contract. For instance, 

Yury Romanyuk, deputy of the local Ivano-Frankovsk 

district council, claimed that the contract contained a 

series of controversial clauses. One of them allegedly 

gave Chevron permission to produce any hydrocarbons it finds in the depth of up to 10-km during its 

explorations of the area. The contract also allegedly 

gave Chevron a right to claim water in case there was 

a scarcity in a gas production area—an allegation that 

has not been proven. In December 2014, Chevron 

announced it was pulling out of its $10 billion shale 

gas exploration project.156 The Ukrainian State Geological Service estimates the Olesska region to contain 

between 0.8 and 1.5-tcm of shale gas, while the Yuzivska region is estimated to contain 2-tcm.157 The U.S. 

Energy Information Administration is less optimistic 

and estimates Ukraine’s total shale gas reserves at 

1.2-tcm.158 In August 2014, Royal Dutch Shell froze its 

shale gas exploration in Ukraine due to security concerns arising from the conflict in the eastern section 

of the country.159 However, in September 2014, the 

company reassured Ukraine that it would continue 

developing shale gas fields in eastern Ukraine despite 

the unfavorable situation due to the conflict between 

Russia and Ukraine.160

Before its decision to pull out, Chevron was planning to develop a field in the Olesska area near Lviv 

in western Ukraine and was ready to invest $10 billion into production of hydrocarbons in that area.161
71

Even though this part of Ukraine is not engulfed in a 

war, there are claims that the company is having issues with the regional government. The local population has strongly opposed the production, claiming 

that the hydraulic fracturing would cause irreversible damage to the local environment. After several 

closed-door meetings between the representatives of 

the energy companies and the deputies of the local 

councils, however, they reconsidered and supported 

the drilling operations.162

According to estimates, Ukraine possesses around 

5.5-tcm of shale gas, from which around 1.2-tcm should 

be recoverable.163 Thanks to these reserves, Ukraine 

hopes to become self-sufficient in terms of natural gas 

by 2020. However, after the decision of Chevron to 

cease its exploration activities in Ukraine, the drop in 

gas prices, as well as the uncertain future of the development of the gas fields in the war-torn Donbass region, Ukraine’s prospects of becoming self-sufficient 

in terms of gas look grimmer than ever before.

Imports from the United States.

Due to the expansion of shale gas production in 

the United States, it is expected to become a net gas 

exporter by 2017.164 The reasons behind this shift is not 

only the boom of the U.S. shale gas industry, but also 

improvements in the Mexican pipeline capacity and a 

drop in the U.S. domestic demand for Canadian gas. 

Central European countries are eager to diversify 

their sources of gas and include the United States as 

one of those sources. In March 2014, ambassadors of 

Hungary, Poland, the Czech Republic, and Slovakia 

sent a joint letter to Speaker of the U.S. House of Representatives John Boehner in which they urged his 
72

support in overcoming the U.S. domestic bureaucratic 

hurdles preventing U.S. gas companies from exporting 

LNG to the rest of the world, including Europe.165 In 

response to the letter, Boehner called upon the Barack 

Obama administration to approve the then pending 

natural gas export requests. As of November 14, 2014, 

nine approvals for LNG exports to non- Free Trade 

Agreement (FTA) countries were issued.166 Although 

the approvals for LNG exports to non-FTA countries 

are slowly being issued, the question that remains is 

the actual physical ability of the United States to contribute substantially to the global LNG market and 

thus provide Europe with a realistic, albeit expensive, 

alternative. Bernstein Research claims that, while the 

U.S. Government approved LNG export projects for 

10 billion cubic feet (bcf) per day as of May 2014, there 

is only room for around 6 to 7-bcf per day of U.S. LNG 

exports in the next 5 years.167 The reason for that is 

the slow approval process, which delays the start of 

construction of these facilities.

As of May 2015, the U.S. Department of Energy 

(DOE) approved 10 LNG export projects,168 with most 

of the export terminals in Texas and Louisiana.169

Pending DOE review are 33 other projects. The first 

export terminal that received final approval from the 

U.S. Government is the Cheniere Energy’s Sabine Pass 

Liquefaction terminal in Cameron Parish, with a capacity of 4-bcf per day (around 41-bcm per year).170 171

It should be finished in late-2015.172 Four other export 

terminals are under construction as of June 2015. Experts expect the global LNG trade to reach 450-bcm in 

2019.173
73

European LNG Imports from Outside 

the United States.

U.S. LNG exports may benefit European energy 

security. According to Gas Infrastructure Europe, the 

EU gets approximately 46 percent of its annual LNG 

imports from Qatar, which exported 17.23-bcm of 

LNG to Europe in 2013.174 The second country after 

Qatar was Algeria, which in 2013 supplied 9.73-bcm. 

The main European LNG importers are Spain, the UK, 

France, and Italy.

In 2013, due to the large price differential between 

the gas prices in Europe and East Asia, European LNG 

imports collapsed and represented only 14 percent of 

the global LNG trade.175 Instead, Asia has imported 

three-quarters of the global LNG volume, which 

amounted to 332-bcm in 2013. However, the price differential essentially disappeared in early-2015. For instance, the Japan Korea Marker (JKM) spot price fell to 

$6.725 per Million Metric British thermal unit (MMBtu) 

in January 2015,176 down from almost $20 per MMBtu 

in early-2014.177 In March 2015 (i.e., for April 2015 

deliveries), the JKM LNG spot price slightly rose to 

$7.279 per MMBtu. Most of the drop in the price level 

occurred in the first half of 2014. The main reason for 

such a sharp decline has been a decrease in demand 

due to a regional economic slowdown, a mild 2014-15 

winter in the region, and a lower demand for gas than 

expected.178 In addition, in late-2014, Japan restarted 

its nuclear reactors. In November 2014, two reactors 

at Sendai in the Kagoshima province were approved 

to be restarted—the first reactors since the 2011 Fukushima Daiichi accident.179 The actual restart is planned 

for the summer of 2015.180 The restart of nuclear reactors will limit Japan’s massive LNG imports and will 

contribute to a lower LNG spot price.
74

Algeria, Nigeria, Angola, and Mozambique.

Africa holds large volumes of natural gas and has 

great potential, especially off-shore. However, political instability stemming from inadequately developed 

institutions, the lack of the rule of law, and corruption 

may hinder the future progress of Africa becoming a 

major global supplier of LNG.

Algeria is an important source of piped gas for Europe, mainly France. However, it has been a victim of 

Islamic radicals who repeatedly target its energy companies and have even kidnapped employees of these 

companies. For instance, in early-2013, Islamist militants killed three people and kidnapped more than 40 

foreigners working at a gas field.181 In early June 2016, 

the Algerian wing of al-Qaeda perpetrated two attacks 

on the Algerian military and security forces, killing an 

army colonel and four members of a watch brigade.182

Nigerian total estimated gas reserves amount to 

over 180-tcf.183 In June 2014, Nigeria voiced readiness 

to help the EU with meeting EU long-term gas demands. Currently, Nigeria operates one LNG export 

terminal on Bonny Island, owned by Nigeria LNG 

Ltd., with a capacity of 22 million metric tons (around 

30.5-bcm) per year.184 There is another LNG project in 

Nigeria—a so-called Brass LNG Project, which should 

be able to produce 10 million metric tons (around 14-

bcm) of LNG per year.185 The French energy company 

Total owns 17 percent of the equity of the project. The 

other shareholders are Nigerian National Petroleum 

Corporation (holding 49 percent), ConocoPhillips (17 

percent of shares), and ENI (also 17 percent of shares). 

However, this project is still only in its early stage of 

engineering work, and the year of its launch is not yet 

determined.
75

Chevron is the largest shareholder in the construction of an LNG export terminal in Angola.186 Other 

shareholders are Sonangol, Total, British Petroleum 

(BP), and ENI. Its projected capacity is 6.8-bcm per 

year. The construction of the terminal has been accompanied by numerous accidents, including multiple electrical fires, pipeline leaks, and a collapse of 

a rig.187 The project was originally expected to be fully 

launched in 2011, but the series of construction accidents delayed this target by several years. As of May 

2015, Chevron expected the terminal to become operational again by the end of 2015.188

Mozambique will be the third sub-Saharan African 

country to host an LNG plant after Nigeria and Angola. Mozambique has between 45 and 70-tcf (1.35 to 

2-tcm) of estimated recoverable natural gas reserves 

in its offshore area.189 The offshore system is expected to produce up to 4-bcf of gas per day (around 

41-bcm per year). After its launch, the onshore LNG 

infrastructure is expected to produce around 10 million tons (around 14-bcm) per year. U.S. oil company 

Anadarko Petroleum is building the first two of the 10 

planned LNG plants in Mozambique. The initial plan 

of Mozambique was to have the LNG facility ready 

by 2018. However, meeting this deadline is not certain.190 Another, more realistic plan is that production 

should start in 2021. As of October 2014, work on the 

LNG terminal had not started and was in the stage of 

governmental approval. Nevertheless, gas companies 

from around the world are already concluding deals 

on LNG imports from the country.191 The largest deals 

so far have been those to ship LNG to China, Japan, 

the United Arab Emirates, Thailand, and India.

These LNG projects in review and under construction in sub-Saharan Africa are a positive signal for the 

EU. As new suppliers fill the lucrative global LNG 
76

market and as the oil prices continue to plunge, the 

global LNG prices will be pushed downwards. If that 

remains the case in the coming years, the EU will be 

able to import LNG at lower prices than it is now. That 

will provide the Old Continent with a more affordable alternative to Russian piped gas in case of supply 

disruptions from Russia.

Eastern Mediterranean.

Europe may not need to reach as far as Africa to 

get its fill of gas. Eastern Mediterranean is in the European neighborhood. The main potential gas fields in 

the Eastern Mediterranean are in the territorial waters 

of Cyprus and Israel. The main gas fields are Tamar, 

Leviathan (both Israel), and Aphrodite (Cyprus). The 

Tamar field contains approximately 250-bcm of gas 

reserves and the larger Leviathan field contains 476-

bcm. The Aphrodite field contains only 141-bcm of 

gas. However, the development of these fields seems 

to be problematic due to a range of internal regulatory 

disputes (Israel), interstate disputes (Turkey/Cyprus 

and Turkey/Israel), and technical difficulties such as 

the depth of the sea between Cyprus and Crete. 

Offshore gas was found in Israel in 2009.192 Both 

Israel and Cyprus have aspired to tap the subsea gas 

fields and become suppliers of gas for Europe. However, the potential problems with exploiting these gas 

fields are that it is too risky in terms of geography 

and politics. 

The Eastern Mediterranean is an area with high 

seismic activity. The costs of building a pipeline that 

would be able to transport gas from these fields to 

Europe via Crete and Greece would be too expensive. 

According to estimates, its construction would cost 
77

around $20 billion. Instead, it is more economically 

feasible to send the gas from the area to the neighbors, including Jordan and Egypt,193 and/or to build 

a pipeline sending the gas from Cyprus and Israel up 

to Turkey and Europe. However, Turkey’s President 

Recep Tayyip Erdogan refuses to cooperate on a pipeline from Cyprus to Turkey until the Cyprus dispute 

is resolved.

Development of these gas fields is also risky politically because of the unresolved issue of the Turkish Northern Cyprus. Turkey does not recognize 

EU member Cyprus as an independent country and 

strongly opposes drilling activities in the area, including deploying its geophysics research vessel in 

Cypriot territorial waters. Ankara has threatened to 

use military force to disrupt Cypriot exploration and 

production.194

In the meantime, Israel supports Cypriot exploration of the area.195 Tensions escalated in October 2014, 

when Turkey sent an exploration ship, accompanied 

by two military vessels, into the disputed waters with 

Cyprus.196 This led to a suspension of the peace talks 

with Turkey by Cyprus President Nicos Anastasiades. 

The United States and the EU also condemned the 

Turkish move. Given that the development of these 

gas fields may lead to great benefits for Europe, Turkey should reduce tensions with Cyprus and Israel 

that jeopardize exploration and production of the offshore gas reserves. A potential problem with building a pipeline from Israel and Cyprus to Turkey is the 

tense political situation between the two countries and 

Ankara, especially after the Israeli raid on the Mevi 

Marmara, a Turkish vessel carrying pro-Palestinian Islamist activists of the terrorist-connected charity The 

Foundation for Human Rights and Freedoms (IHH) in 

2010.197
78

Another problem with the area is the delimitation 

of maritime boundaries between the countries of the 

region. This is the case between Israel and Lebanon, 

where the absence of an internationally recognized 

land border prevents the countries from delimiting 

their maritime border. Similar problem exists between 

Cyprus and Turkey in the Mediterranean.198 In October 2014, the tensions between the two countries 

reached another spike when Turkey sent navy ships 

into disputed waters south of Cyprus after the Cypriot government granted permission to Eni SpA to test 

drill in the area.199 It remains to be seen if the setback 

Erdogan’s Justice and Development Party (JDP or AK 

Party) suffered in the June 2015 parliamentary elections may improve the energy security climate in the 

Eastern Mediterranean.

TURKMENISTAN, TRANS-ANATOLIAN 

NATURAL GAS PIPELINE, 

AND TRANS ADRIATIC PIPELINE

The Trans-Anatolian Natural Gas Pipeline 

(TANAP) and the Trans Adriatic Pipeline (TAP) are 

part of a so-called Southern Gas Corridor. TANAP 

and TAP represent a pipeline project that will transport Caspian natural gas from Azerbaijan through 

Georgia and Turkey and further into Europe through 

Greece and Albania. The construction of TANAP 

and TAP began in 2015, and the corridor should become operational in 2018. Azerbaijan will become the 

principal supplier of gas to what will be the longest 

pipeline project in Europe. Its Shah Deniz I and Shah 

Deniz II fields in the Caspian Sea will be the primary 

sources of gas for the corridor. The Shah Deniz I started producing gas in 2006 and has a production capac-
79

ity of around 10-bcm per year.200 Shah Deniz II, which 

should come online in 2018, should supply another 16-

bcm of gas per year into the system.201 Turkmenistan 

has also recently re-emerged as a potential additional 

source of gas for this project. After the cancellation of 

the Russia-dominated South Stream project, the significance of the Southern Gas Corridor has increased. 

Nevertheless, the projected capacity of the entire corridor, which is expected to carry mainly Caspian gas 

through Turkey to Southern Europe, is 16 to 20-bcm 

per year, with options for an upgrade. 

Azerbaijan, which should be the primary source of 

gas for the corridor, has supplies from the Shah Deniz 

II offshore gas field in the Caspian Sea. The project 

will supply 16-bcm annually, 6-bcm of which will be 

consumed by Turkey.202 There are plans for the third 

stage (Shah Deniz III) after 2025, which could supply 

up to an additional 25-bcm per year.203 Other sources 

of gas for TANAP potentially could be countries like 

Turkmenistan, Iran, or Iraq, all of which have tremendous resources. However, each of these countries has 

its own political risk factors that make their supplying 

of TANAP uncertain.

Turkmenistan can play a significant role in developing the Southern Gas Corridor, but many observers 

are skeptical. In early May 2015, Turkmenistan reaffirmed its commitment to join TANAP, which is to 

form a part of the Southern Corridor.204 In particular, 

Turkmenistan is interested in connecting its western 

gas fields to TANAP, which eventually would allow 

it to expand its gas exports to Europe.205 Turkmenistan has the fourth largest gas reserves in the world. 

However, Turkmenistan is unlikely to pursue policies 

which might jeopardize its relations with Russia—

Turkmenistan’s gas importer and trade partner.206
80

Moreover, China, the main Turkmenistan’s gas customer, is likely to object as it invested billions of dollars in the Central Asia-China pipeline, and Beijing 

would like to keep the reserves. 

Thus, the long-proposed Trans-Caspian Pipeline 

continues to be in question. The maximum existing 

gas export capacity from Turkmenistan is now close 

to 100-bcm per year,207 significantly exceeding that of 

Azerbaijan. Most of Turkmenistan’s gas production 

currently goes to China.208 Gas is exported through 

the Central Asia-China pipeline, the longest gas pipeline built by China National Petroleum Corporation 

(CNPC) which transports 55-bcm annually.209 However, Turkmenistan does not have an independent route 

by which it could transport the gas to Europe, bypassing Russia. By resisting the demarcation of maritime 

borders in the Caspian Sea and especially by refusing 

to design a regime for natural resources and mineral 

right exploitation, Russia and Iran prevent Turkmenistan and Azerbaijan from building a submarine gas 

pipeline between the two countries. Such an interconnector could carry Turkmen gas to the Azerbaijani 

Main Export Pipeline and further to Turkey and to 

Southern Europe via the Southern Gas Corridor and 

its TANAP/TAP pipelines.

Russia therefore secures its own position as a buyer and re-exporter of Turkmen gas, or at least blocks 

its exports, which contributes to maintaining its oligopolistic position in the European gas market. In the 

meantime, Turkmenistan is focusing on selling its gas 

to the East and South, most importantly to China and 

to Iran.210 While Iran continues to be a market and a 

potential transit country for Turkmen gas (Iran now 

buys approximately 10 percent of Turkmen gas exports to supply its northern provinces), it is commit-
81

ted to increase domestic production and end imports 

from its northern neighbor.211 Turkmenistan could 

become an important alternative source of gas for 

Europe, as Norway and Algeria already are.

Norway.

Russia and Eurasia are not the sole suppliers of gas 

to Europe. Norway, a NATO member, is also a significant source of gas. According to the EIA, Norway supplies more than 20 percent of Europe’s gas demand.212

In 2013, Norway supplied 21 percent of Europe’s gas 

needs. After Russia and Qatar, Norway is the world’s 

third largest exporter of gas. In 2013, most of Norway’s 

gas exports reached the UK, Germany, and France.

Norway has little potential to boost its exports to 

the EU in case of need, however.213 In the wintertime, 

the capacity of Norway’s gas system is almost fully 

utilized, as European demand increases seasonally. 

There is a limited capacity for an increase in production and export from Norway’s continental shelf. For 

a short time in season, Norway is able to provide up 

to 130 million cubic meters of gas for exports daily.214

However, countries like Bulgaria, Slovakia, or Hungary, which depend more on Russian gas than does 

Western Europe, have enough gas stored in their underground reservoirs for around 3 months. Therefore, 

Norway cannot be counted upon to be able to replace 

shortfalls in Russian gas supplies in the short run, but 

switching the Baltic States to Norwegian gas makes 

sense.

In the long run, Norway does not look like a promising source of gas for the EU. According to the Norwegian Petroleum Directorate, in the first half of 2014, 

despite an increase in demand, Norway’s overall gas 
82

production slightly decreased by 2.5 percent compared to the same period of 2013.215 Forecasts predicting a meaningful increase in Norway’s gas output in 

the future are unavailable. Yet, there are additional 

and massive sources of natural gas for Europe, such 

as Iran.

Iran.

Iran has the second largest gas reserves in the 

world, after Russia. In early May 2014, Iran proposed 

the EU compensate potential cutoffs of Russian gas 

due to the war of sanctions between Russia and the 

West.216 However, this Iranian initiative was unrealistic due to the sanctions regime, which the United Nations (UN) imposed on Iran in order to stop its nuclear 

program. Until the Joint Comprehensive Plan of Action was signed in Vienna, Austria, by China, France, 

Russia, the UK, the United States, Germany (the P5 + 

1), and the Islamic Republic on July 14, 2015,217 gaining hydrocarbon supplies from Iran was unrealistic. 

Today, however, the situation is changing rapidly. 

Companies such as ENI, Shell, Total, and others have 

already beaten a track to Teheran’s energy decisionmakers’ doors.218 While Iran is not ready to supply 

gas to Europe either through pipelines or in the LNG 

form, an all-out effort to change this will take place. 

The pipeline through Turkey is available, and can 

currently supply up to 20-bcm a year, with Turkey 

buying about 10-bcm. With upgrades, that pipeline 

can supply up to 25 to 30-bcm annually in as little as 2 

years. An additional pipeline is feasible, but funding 

and construction may take 5 years or more. Reserves 

are not the issue—financing, negotiating the right 

deal, and supplying technology is. Furthermore, Iran 

is undoubtedly willing to enter the LNG market, and 
83

will be able to supply Europe via LNG tankers. However, even if the Western sanctions on Iran were lifted 

immediately, it would take years for Iran to be able 

to export meaningful amounts of gas to Europe due 

to lacking appropriate gas production and transport 

infrastructure.

First, Iran has no LNG liquefaction terminal, and 

therefore Iran does not export any LNG. The Iranian government launched a project called Iran LNG, 

which foresees construction of an LNG terminal in 

the city of Tombak in the Busher region, which also is 

hosting the first Iranian commercial nuclear reactor.219

Nevertheless, the lack of Iran’s access to modern LNG 

technologies because of the sanctions, which prohibit 

Western firms from exporting technology for Iran’s oil 

and gas industry, has constrained the project. Shortage 

of capital is another militating factor. Thus, Iran needs 

to rely on pipelines for exports of gas. However, the 

Iranian pipeline’s gas export is problematic due to the 

country’s insufficient and obsolete infrastructure. Currently, the only country to which Iran exports meaningful amounts of gas is Turkey. In 2011, the amount 

of trade with natural gas between the two countries 

was 8.4-bcm through the Tabriz-Ankara Pipeline. In 

2015, the amount of projected trade in gas increased 

to around 10-bcm.220 However, the export of the gas to 

Europe is impractical due to the lack of infrastructure 

and the current war in Iraq. 

The annual capacity of the Tabriz-Ankara Pipeline 

is only 14-bcm.221 Besides this pipeline, there is also 

a project of the so-called Persian Pipeline, started in 

2009.222 The pipeline would run from Iran through 

Turkey and further to Europe. The Iranian part should 

be 1,740-km long, with a projected capacity of up to 

40-bcm per year. This pipeline was planned to become 

operational by 2014, which did not happen due to 
84

sanctions. Even if these pipelines were built, reliability 

of the supply from Iran would be questionable. Since 

its launch in 2002, the Tabriz-Ankara Pipeline has experienced disruption due to attacks by Kurdish separatists in the north of Iran and in southeast Turkey. In 

late-2012, Kurdish violent separatist and the terrorist 

group the Kurdistan Workers Party (PKK) bombed 

the pipeline, wounding 28 Turkish soldiers.223 The security in this area has also deteriorated because of the 

civil war in Syria and Iraq, which affected southern 

Turkey as well. In addition to these attacks, Iran itself also has a dubious record of ensuring stable gas 

supplies to Turkey, as it has repeatedly reduced or cut 

off exports to Turkey as needed to satisfy its domestic 

supply.

Another factor that jeopardizes the prospects of 

Iranian gas exports to Turkey and to Europe are the 

Western sanctions imposed on Iran. These sanctions 

forced Turkey to lower its imports of Iranian gas, 

which in turn makes Turkey more dependent on Russia. In particular, the EU imposed sanctions on Iran’s 

gas sector already under sanctions in October 2012, 

which precludes Iranian gas exports to the EU. Two 

other of Iran’s LNG projects—Pars LNG and Persian 

LNG—were canceled due to the sanctions.224 Even if 

this pipeline allowed higher export capacity, there is 

currently no pipeline that would be able to transport 

the gas further west from Turkey to Europe. The Nabucco pipeline project, which was proposed back in 

2002 and expected to carry gas from the Caspian Sea 

and possibly Iran to Europe, bypassing Russia and 

Ukraine, has been abandoned.225

Thus, Iran’s capabilities to become a source of gas 

for Europe are limited for now, but may improve in 

the future. Were its rulers to pursue a rational state 
85

interest, they should be making an supreme effort not 

just to lift the sanctions, but address the root causes 

which triggered these measures: a dangerous nuclear 

build-up program, including the full cycle of uranium 

enrichment; the expansion of the medium range ballistic missile arsenal; and support of terrorism.

With the deal announced, Russia needs to start 

viewing Iran as a major gas exporter. Europe is likely 

to diversify its supply by buying 20-40-bcm a year 

from Teheran.

Northern Iraq/Kurdistan: U.S. Assistance Needed.

An alternative source of gas for Europe may be 

northern Iraq, known as Iraqi Kurdistan and administered by the Kurdish Regional Government (KRG).226

The overall Iraqi estimated gas resources are around 

1.7 percent of the total estimated world’s supplies.227

According to the KRG, in the north of Iraq the estimated conventional gas reserves of the region alone are 

165-tcf (4.95-tcm) of gas, out of which 38-tcf (1.14-tcm) 

of gas is recoverable.228 However, unlike the existing 

oil pipelines, there are currently no gas pipelines from 

Northern Iraq to Turkey, which could transport this 

gas to Turkey and further to Europe if the gas reserves 

were tapped. Therefore, Turkey is looking at two basic options: ensuring exports from northern Iraq itself 

or transforming northern Iraq into a transit corridor 

for the gas from the rest of the country and possibly 

from Iran.

However, Northern Iraq remains a problematic 

supplier of gas even if its gas fields do become connected to the Turkish gas grid and the future hub for 

Europe. For now, Northern Iraq, together with the rest 

of the country, continues to suffer from a high level of 
86

volatility due to the Islamic State (IS)/Daesh operations and the unresolved issue of Kurdish autonomy. 

U.S. and Turkish military assistance is needed, including training and equipment, to make the Kurds 

capable of managing security risks to their energy infrastructure, as mentioned in the next section.

Another project would be the connection of the 

Turkish and Iraqi gas networks to the Arab Gas Pipeline. The Arab Gas Pipeline runs from Egypt, bypasses 

Israel, runs north through Jordan and Syria, and ends 

in the Syrian city of Homs. From the security standpoint, this pipeline is hopeless as Syria is in the midst 

of a civil war, and it is currently not connected to the 

Turkish territory. Moreover, as with Egyptian gas, 

production is falling, and, as Cairo is planning to buy 

gas from the offshore Israeli fields, the value of the 

Arab pipeline is in doubt. In fact, one day it can be 

reversed to ship Iraqi gas to Syria, Jordan, and Egypt.

Libya: A Country in Search of a State.

In addition to the Middle East, Libya also remains 

an important potential source of gas for Europe. However, Libya faces systemic instability, which prevents 

its gas potential from adequate development.

Libya has massive resources of natural gas. Its 

proven natural gas reserves reach 1.5-tcm,229 however, the Libyan conflict has drastically affected its 

gas production. While in 2010 the country produced 

30.3-bcm of gas in total, in 2011 the number fell more 

than threefold—to just 9.9-bcm.230 In 2012 and 2013, 

the production partially recovered, reaching 23.4 and 

22.9-bcm in 2012 and 2013, respectively. Thus, Libya 

has enough potential to increase its exports to Europe 

by around 10-bcm per year.231 Libya’s natural gas is 
87

exported to Europe through the Greenstream (part of 

the Western Libya Gas Project) underwater pipeline to 

Sicily. The pipeline has a capacity of 11-bcm per year. 

Libya has not been able to build a significant LNG capacity due to the technical limitations resulting from 

Western sanctions against the late Colonel Muammar 

Qaddafi’s regime in the 2000s and from the turmoil 

after his removal from power in late-2011. With the 

collapse of the Libyan statehood post-2011 Western 

intervention, the chances to expand Libyan gas production and exports remain grim.

If the political risk environment improves in the 

future, and a stable regime or regimes are in place, 

Libya is likely to return to be an important gas supplier for Europe. The U.S. Army can provide training 

and equipment to the future Libyan military when 

a stable national government is reinstated, or if the 

country is permanently divided.

Algeria is the third most important supplier of natural gas to Europe, after Norway and Russia. It may 

also become a transit area for gas from Nigeria. The 

planned Trans-Saharan natural gas pipeline would 

have a capacity of 30-bcm per year and should run 

from Nigerian gas fields through Niger to Algeria, 

from where the gas would continue to flow further 

north to Italy and Spain. The deal for the construction 

of the pipeline was signed in Nigeria in 2009.232 However, security concerns due to the volatile situation 

along the entire pipeline route, as well as the ongoing 

regulatory and political uncertainty in Nigeria, have 

continued to delay this project. In 2014, Nigeria’s thenpresident, Goodluck Jonathan, said that he expects to 

have the Nigerian segment of the pipeline completed 

by 2018.233 However, even if the Nigerian section of 

the pipeline gets built, it is far from certain whether 
88

this pipeline will become operational in the foreseeable future. The Nigeria-Algeria-Europe pipeline 

remains a long shot.

U.S. INTERESTS, THE U.S. MILITARY, 

THE U.S. ARMY, AND EUROPEAN 

ENERGY SECURITY

General.

The United States is interested in the economic stability and growth of Europe, as the EU is the principal and the largest trade partner of the United States. 

The United States and the EU have the largest trade 

and investment relationship in the world.234 This relationship has persevered through the 2007-08 financial 

crisis. In 2014 alone, the American economy exported 

goods and services totaling $276.7 billion to Europe.235

This transatlantic economic interconnectedness means 

that the U.S. economic growth and stability partly depends on the economic developments in Europe, and 

vice versa. As the United States is now and is likely to 

continue to be interested in a strong and stable European market, the European energy security indirectly 

contributes to U.S. economic stability. Moreover, this 

mutual economic integration and dependence between the United States and the EU may be further 

deepened when the Transatlantic Trade and Investment Partnership agreement (TTIP) is successfully 

concluded and enters into force. Finalizing this agreement seems to be no easy task, and TTIP has already 

failed one congressional vote.236

Europe’s energy security is not something that can 

be improved overnight. Therefore, it is in the U.S. interest to support Europe’s efforts at achieving better 
89

energy security now and in the years to come. European electricity production and heat for households 

are inconceivable without a steady supply of natural 

gas, most of it imported to Europe from neighbors, 

near and far. Thus, the United States, as an ally and 

a security partner of Europe, is interested in the continent’s energy security and an uninterrupted inflow 

of natural gas by pipe in the form of LNG, and in local development of natural gas production in Europe, 

including from shale.

Europe’s energy independence is not only in the 

economic interest of America, but also in its political and security interests. Europe’s dependence on 

Russian natural gas undermines European unity and 

weakens the primary U.S. allies in their relations with 

Russia. The involvement, increased deployment, and 

enhanced training activities of the U.S. military in 

Central and Eastern Europe will send a clear message 

to Russia: “pull in your horns” and stop the escalation. 

If this signal is received in Moscow, it will also make 

the flow of energy resources from Russia to Europe 

more stable and will put a disincentive on Putin’s use 

of energy as a weapon. With Europe independent of 

Russian pressure, it may become a more valuable U.S. 

ally in pursing Western interests around the globe, including fighting terror in the Middle East, balancing 

the rising China, etc.

While the United States has rapidly improved its 

energy independence in the past decade and has great 

potential to continue doing so, Europe is in a far more 

complex situation, encircled by the volatile Middle 

East and North Africa region to the south and Russia 

to the east. Any turmoil in Europe’s energy situation 

may adversely affect American exporters selling their 

goods and services in Europe. Thus, the time to act for 

both the United States and Europe is now.
90

Energy Policy Recommendations.

The principal recommendation to the U.S. Government is to impose as few restrictions as possible in the 

way of future U.S. LNG exports to Europe. The pace of 

construction of the LNG terminals in the United States 

capable of exporting meaningful amounts of LNG to 

Europe is falling behind the more rapidly developing 

terminals in Canada and Australia.237 Not far behind 

are large-scale developments in offshore Africa.238

Lifting the restrictions would be a major signal to potential American LNG exporters that the future cash 

flow from their large investments in constructing LNG 

terminals will not be hindered by restrictions imposed 

by the U.S. Government. Before the West imposed its 

sanctions on Russia, Gazprom was also ahead of the 

game regarding natural gas exports to Europe. Therefore, while Europe builds the new LNG terminals, its 

alternative is to continue importing relatively cheap 

Russian piped gas, and at the same time expand its 

non-Russian piped supplies, such as the Southern 

Gas Corridor from the Caspian region, together with 

importing LNG.

The United States can also advocate and champion 

the construction of the intra-European gas interconnector network, which is in dire need of massive funding. Currently, EU funding, including financing under 

the so-called “Juncker package,” is considered as one 

of the alternatives.239 However, U.S. capacities and 

expertise in this regard may bring great value to the 

construction of the interconnector network and, most 

importantly, to the finalization of the reversible northsouth gas pipeline route through Central Europe from 

the Baltic to the Adriatic, in the shortest time possible.
91

Recommendations for the U.S. Military. 

The U.S. Armed Forces play an important role 

in providing European security since World War II. 

Today, the U.S. military’s role in European energy 

security can be summarized as follows: 

• Conduct a comprehensive assessment of the security of European energy imports, including 

natural gas, coal, uranium, and oil. Monitor the 

threats to pipelines and to the natural gas balance through the U.S. intelligence community 

and their counterparts in Europe, Turkey, and 

the Middle East. Share intelligence where possible. Additionally, conduct open sources analysis of the security of Europe’s energy supply 

through the available, high quality, nongovernment expertise in think tanks and the private 

sector.

• Develop in cooperation with NATO, European 

Command, and Central Command, a system 

to monitor threats to critical energy infrastructure. The EU also needs a system of monitoring 

threats to the intra-European gas network. Interconnectors will become the key component 

of European gas independence from Russia 

and need to be monitored properly. In particular, the U.S. Army should develop joint threat 

assessment and emergency planning and response protocols for threats to individual gas 

fields, pipelines, gas processing facilities, storage facilities, pumping stations, and other crucial infrastructure components.

• Ensure that NATO and individual European 

and Middle Eastern-North African countries 
92

have interoperability standards and joint tactics, techniques, and procedures which would 

allow them to coordinate and interact in case of 

the threats to the natural gas infrastructure as 

recently seen in Algeria.240

Recommendations for the U.S. Army.

The U.S. Army deployed in Europe is a crucial 

component providing NATO and regional security, 

interacting with NATO and non-NATO allies, and 

assisting in training these allies’ militaries. The U.S. 

Army should:

• Cooperate with NATO, national militaries of 

NATO members and non-NATO allies, their 

intelligence services and law enforcement, as 

well as with energy companies to ensure security of pipelines and other gas facilities. The 

crucial infrastructure components of the EU 

natural gas energy security are the Main Export Pipelines coming from Russia/Ukraine 

and North Africa, the system of gas hubs (such 

as Baumgarten in Austria), and pipeline interconnectors between the European countries, as 

well as LNG import terminals.

• Use its expertise and capacity to help the allies 

in Central Europe protect the interconnectors, 

as one cannot exclude an attempt of Russia to 

sabotage this crucial infrastructure. In particular, the emphasis needs to be put on training 

and equipping our Central and Eastern European NATO allies, as well as Ukraine and 

Moldova. To properly identify weak spots and 

ensure the security of pipelines and other gas 

facilities, the U.S. Army needs to ensure it con-
93

ducts an accurate assessment/security audit 

of each interconnector security challenge and 

potential threat.

• Prepare for energy crisis-related disaster relief 

in Europe in cooperation with European militaries in the NATO framework and the EU and 

national emergency responders, and build on 

its experience in developing infrastructure protection plans in the United States and around 

the world to outline similar plans, programs, 

and procedures in Europe. In case of a future 

disruption of Russian gas supplies to Europe, 

Europe would be able to weather the crisis better if it had a joint plan with the United States 

instead of trying to find an ad hoc solution.

• Train forces for critical energy infrastructure 

protection. The United States has developed an 

effective system of critical infrastructure protection at home and can share its expertise with 

its European allies.

• Train and equip local militaries and other 

forces for energy infrastructure protection and 

actively pursue those who are trying to destroy energy infrastructure. Thus, the struggle 

against violent religious extremists is directly 

connected to U.S. efforts to keep oil and gas 

infrastructure, the electricity grids, ports, and 

airports secure. The U.S. Army can and should 

cooperate in the design of local military and 

security components and units, as well as the 

strategy and tactics necessary to ensure both 

intelligence gathering and the hard security 

aspects of critical energy infrastructure protection. In particular, this should apply to the energy-rich countries of North Africa and Sahel, 
94

including Nigeria, Chad, Algeria, Libya, and 

Tunisia. The United States should also evaluate the needs and capabilities of the Kurdish 

forces, which already are cooperating with the 

United States in fighting the IS/Dasesh. A clear 

distinction between the operational requirements of the war against the IS and long-term 

infrastructure protection needs to be made by 

evaluators.

• Temporarily protect critical energy facilities 

and infrastructure. When the United States is 

in the process of training the European forces 

to protect the intra-European gas infrastructure, the United States should use its own capabilities to ensure proper protection of the infrastructure until European forces are capable to 

perform these tasks on their own.

CONCLUSIONS: DIMINISHING EUROPE’S 

DEPENDENCE ON RUSSIAN GAS—

A U.S.-EUROPEAN POLICY GOAL WHOSE 

TIME HAS ARRIVED

Due to the lack of new viable gas pipeline routes 

from alternative geographic sources and a generally 

negative attitude in Europe towards shale gas production, the only viable alternative for Europe is to 

speed up pipeline construction from the continent’s 

periphery. Europe should also substitute some of the 

Russian gas with LNG imports from North America, 

while developing Eastern Mediterranean and sub-Saharan Africa as sources of gas. These goals should be 

achieved in the 2019-25 timeframe.

Unfortunately, Russia has proven to be an unreliable gas supplier because it merges business with pol-
95

itics. Unlike in the West, where international energy 

companies pursue profits and as a rule refrain from 

pressure on particular countries, Russia’s Gazprom 

is majority state-owned and is a tool in the hands of 

the Kremlin. Beyond this ostensible strength, Russia’s 

weakness in the international arena is its unpredictability. The Kremlin has a record of making shortsighted decisions aimed at maximizing its short-term 

geopolitical gains at the expense of maximizing the 

long-term economic ones. Natural gas cannot be used 

as a weapon and a commodity at the same time just 

like oil eventually lost the might it enjoyed throughout the 1970s. 

Gas discounts may have worked as carrots for 

certain countries and swayed political decisions in 

Russia’s favor. Gazprom charges the Baltic States 

the highest prices because, for a while, they have the 

weakest alternative sources. Deliberate gas disruptions to Ukraine may have forced the latter to pay at 

least part of its bills. However, Russia and Gazprom 

seem not to have taken into account that the world is 

not a static place. The fact that some countries had to 

provide foreign policy concessions to the Kremlin to 

restore gas supplies at one time does not mean that 

it will be the case forever. The fact that some countries are charged more than others merely for political 

reasons will not last forever, either. This shortsighted 

Russian behavior incentivizes Europe to seek alternative sources of gas other than Russia, which in the 

long run will economically hurt both sides. It will hurt 

Europe, which has to invest into interconnectors, new 

LNG facilities, and other infrastructure that would not 

be necessary should Russia be a liberalized country 

with competitive gas supplies. It hurts Russia, which 

is in the process of losing the European markets.
96

In the world of international commerce, predictability comes from the transparency of legislative 

and regulatory bodies, the rule of law, and businessfriendly regulation, which together contribute to the 

efficiency of the business and economic system. Free 

market competition based on the rule of law allows 

one to expect that, if there is a demand, someone 

would supply a commodity to the customers. Russia 

has been demonstrating that this principle is not valid 

in the case of Gazprom. Through the 1990s, 2006, 2009, 

and as recently as 2014, Russia proved repeatedly that 

its partners cannot count on Gazprom, even when it 

cuts prices and accommodates other demands.

Europe cannot afford to be Gazprom’s hostage—or 

become a pawn in Russian-Ukrainian hostilities when 

Ukraine cannot pay Gazprom for the gas it delivered. 

In such circumstances, if Gazprom were to be a reliable supplier, it would have to manage Ukrainian 

debt and work on its resolution together with the EU. 

The best way for Europe to deal with this lack of predictability is to secure alternative supplies of natural 

gas. Given the lack of readily available sources of additional piped gas, the alternative for Europe is LNG, 

especially after the collapse of the Asian prices. The 

EU does not need to invest heavily in building new 

LNG terminals to use this option, as the excess capacity in Spain and elsewhere is vast. All it has to do is 

to expand the intra-European gas pipeline network, 

pay higher prices, and wait for the export LNG terminals under construction in North America and offshore West and East Africa to come online. The shale 

gas revolution that took place in the United States in 

the last decade will allow the United States to support 

its European allies by ensuring them with a safe and 

predictable alternative, even if it is more expensive 

than the gas Europe gets from Russia: American LNG 
97

exporters will mainly seek profit and are likely to 

prioritize on Asian markets.

Nevertheless, both the LNG and the future alternative pipelines will offset Russia’s advantage in the gas 

price and regulatory negotiations between the EU and 

Gazprom. Russia can go without the gas revenues from 

the EU for significantly longer than the EU can survive 

without Russian gas, but until Russia finds new gas 

markets, and Europe new gas sources, they are locked 

in a symbiotic embrace. With U.S. and African LNG as 

alternatives, and a step towards a permanent solution, 

this asymmetry might virtually go away. That would 

strengthen Europe’s energy security and put the EU 

countries’ relations vis-à-vis Russia on a more equal 

playing field. The U.S. military, and especially the U.S. 

Army, should be there to make it happen.

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124

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U.S. ARMY WAR COLLEGE

Major General William E. Rapp

Commandant

*****

STRATEGIC STUDIES INSTITUTE

and

U.S. ARMY WAR COLLEGE PRESS

Director

Professor Douglas C. Lovelace, Jr.

Director of Research

Dr. Steven K. Metz

Authors

Dr. Arial Cohen

Mr. Ivan Benovic

Editor for Production

Dr. James G. Pierce

Publications Assistant

Ms. Rita A. Rummel

*****

Composition

Mrs. Jennifer E. Nevil