Features Australia

Singing Kumbaya on energy

Understanding Ukraine and the weakness of the West

12 March 2022

9:00 AM

12 March 2022

9:00 AM

I’ve been banging on about the energy crisis in Europe for some time and the implications this has for national security. It’s a message that has largely fallen on deaf ears in Australia – as well as in most other countries – until now

Had it not been for Europe’s dependence on Russian gas and, to a lesser extent, oil, it is difficult to believe that Vladimir Putin would have taken the drastic step of invading Ukraine and inviting the predictable suite of sanctions. Having manipulated the gas market through the Kremlin’s control of the state-owned gas company, Gazprom, he was able to build up a substantial war chest while weakening the economies of Europe and the UK.

It’s worth noting here that Russia is not a wealthy country. Its GDP per head is a tad over $US11,000 compared with around $46,000 in Germany and $38,000 in France.  But Russia has been well run fiscally, has little government debt and even has its own sovereign wealth fund. Around 50 per cent of its exports are oil and gas; it is also a substantial producer of wheat and corn for export.

By contrast, Europe and the UK have been obsessed with the green objective of reducing carbon dioxide emissions. These countries have made substantial investments in intermittent renewable energy, closed down reliable coal-fired power stations and, for those with nuclear power, allowed this industry to wallow. In the most extreme case, Germany decided to close down its nuclear power plants altogether.

In the meantime, all European countries, as well as the UK, have made it more difficult to extract natural gas, either on or offshore. Notwithstanding the presence of potentially long-lasting gas fields sitting under many European countries as well as the UK, the political leaders took the coward’s way out when the anti-fracking mob raised its protesting voices, including a dubious fear campaign based on the possibility of earthquakes and water contamination.

Country after country imposed regulations that effectively prohibited the exploitation of non-conventional gas – just like Dan Andrews in Victoria. As a result, the EU’s output of natural gas has fallen markedly over the past decade or so while its dependence on Russian gas has risen in tandem. The UK also effectively gave up on North Sea gas, with no new drilling licences awarded between 2016 and this year.

As the Wall Street Journal notes, ‘a mere 15 years ago, countries in the European Union produced more gas than Russia exported. Yet European production has plunged by more than half over the last decade. Mr. Putin has happily filled the supply gap. In 2020, Russia exported nearly three times more gas than Europe produced’.

The most egregious example of a country allowing ill-considered climate policies to obscure the security implications is Germany. Let’s not forget that Angela Merkel, Germany’s chancellor, was strongly in favour of Nord Stream 2, the second gas pipeline that would directly connect Russia and Germany (and the rest of the EU). The commissioning of Nord Stream 2 would have meant that 80 per cent of Russian gas would have directly flowed to Germany, largely bypassing Ukraine.

When Merkel signed the Nord Stream 2 deal (which involved a number of Western-listed companies as investors) in 2016, the Kremlin commented in the following way: ‘the Russian president praised the German side’s steadfast loyalty regarding the completion of this purely commercial project that is designed to strengthen Germany’s energy security’. Merkel went even further, claiming that this commercial deal would actually promote peace between the two countries.  After all, she had secured assurances from Russia that the pipeline would never be used as a geopolitical weapon but, if that ever were the case, then Berlin would impose sanctions. Talk about naive.

Is it any wonder that the Americans understood the inherent problem of Germany’s growing dependence on Russian gas and fiercely opposed Nord Stream 2? In fact, it was President Trump who re-emphasised this opposition and urged the German government to build liquefied natural gas receiving terminals in order to diversify its sources of supply. Let’s also not forget here that former German chancellor, Gerhard Schrröder, has been chairman of Nord Stream 2 and the Russian energy company Rosneft since 2017. He was nominated to sit on the board of the Russian government-owned gas monopoly, Gazprom, this year.

It has been obvious for some time that Russia has been using energy – particularly gas piped to Europe – as both a geopolitical weapon and as means of augmenting Russia’s coffers. For the past year, Putin has been turning the screws to ensure that Europe was short of gas, leading to very substantial price rises (up to five times higher than in 2020). The Europeans, for their part, have preferred piped gas because there are no costs attached to the liquefaction/degasification processes as well as the requirement for receiving terminals. Mind you, there would have been an uproar from German environmentalists had an LNG-receiving terminal been seriously proposed. What they forgot in their green haze is that you reap what you sow.

The situation now is leading to a very substantial rethink of energy issues within many European countries. One of the problems, of course, is that there are no easy, short-term solutions. It is not surprising that energy payments have been exempted from the sanctions on Russia in relation to Swift, the international payments arrangement.

Germany has now announced its intention to allow the continuation of three nuclear power plants that were slated to close at the end of this year. Coal-fired plants are also being used to fill gaps and will continue to do so, notwithstanding the stated intention by Germany of being out of coal by 2030. Two LNG-receiving terminals are planned.

The UK has granted a number of drilling licences for the North Sea and has announced its intention to build a number of small nuclear plants. Macron has heralded the ‘renaissance of nuclear’ in France.

The thing is that singing Kumbaya is OK for teenagers at a school camp. But it is no way to conduct foreign policy when some of the players are dictators who simply refuse to sign up to the green dream and are well-placed to manipulate energy markets. It’s time for the West to get real. Perhaps, just perhaps, the Europeans and the UK are waking up to this necessity.

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