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Morgan Lewis
SEPTEMBER 2014
US and EU sanctions impacting Russian energy market
Partner Amy Comer and associate Anna Nerush, of global law firm Morgan Lewis’ London-based business and finance practice, explore the impact of US and EU sanctions upon Russia’s energy and natural resources
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elations between Russia and the West are at risk of further deterioration as the crisis in Ukraine continues, and the US and Europe impose additional economic sanctions against Russia.
Currently, Europe is Russia’s main gas customer with Gazprom’s share of Europe’s gas market reaching approximately 30% in 2013 and Europe is heavily dependent on Russian gas, which is delivered via a network of pipelines across a number of countries, including Ukraine. According to the Report on European Energy Security Strategy published by the European Commission on 28 May 2014 (“Report”), six Member States depend on Russia as the single external supplier for their entire gas imports and three of them use natural gas for more than a quarter of their total energy needs. The Report further emphasises that in 2013 energy supplies from Russia accounted for 39% of EU natural gas imports or 27% of EU gas consumption. In 2013, Russia exported 71% of its gas to Europe with the largest volumes going to Germany and Italy.
But ongoing economic sanctions and political pressure are causing Europe to consider the ongoing security and the potential need for diversification of its energy supplies, and Russia to look for new consumer markets for its natural gas. The European gas markets are changing as Europe, recognising the uncertainties presented by its continued dependency on Russian gas, upgrades and expands pipelines to enable access to existing networks supplying the European markets and reversing gas flow supplies to Eastern European countries dependent on Russian gas. For example, Slovakia has recently announced the completion of successful reverse-flow gas trials on the newly upgraded Vojany-Uzhhorod pipeline, with full-scale operations due to commence in September 2014, delivering approximately 10 billion cubic meters of gas per annum to Ukraine.
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European countries are also considering alternative means of fuel, such as nuclear and coal generated energy and non-conventional gas extraction, with many countries, including the UK, incentivising the domestic shale gas industry. Reducing the dependency on Russia and ensuring new gas supply streams were recently cited as part of a “long list of homework” for the EU by EU’s energy chief, Guenther Oettinger, who stated that “we want strong and stable partnerships with important suppliers, but must avoid falling victim to political and commercial blackmail. We need to accelerate the diversification of external energy suppliers, especially for gas.”
Driven by the knowledge of the consequences of the gas crisis of 2009, the risk of a major and the consequential disruption to European gas supply, are once again at the forefront of Europe’s agenda. The European Commission’s European Energy Security Strategy (“Strategy”) focuses on approaches designed to reduce the EU’s reliance on Russian gas and seeks to establish the standalone independence of European energy supply. The Strategy identifies a number of short term measures to deal with any immediate supply risks, such as increasing gas stocks, developing emergency infrastructure such as reverse flows, reducing short-term energy demand and switching to alternative fuels.
The key challenge for Europe is that there is, at present, no single alternative that could fully and viably replace Russian gas. As a broad gas market heavily reliant on Russian gas and comprising a number of smaller markets with varying legislative frameworks, albeit that the EU provides a consolidating framework overall, Europe does not have apparent flexibility to act quickly in diversifying its sources or suppliers of energy. Whilst there are a number of existing and planned clean energy projects throughout
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