CPC - Caspian Policy Center


the caspian region and europe’s energy crisis

The Caspian Region and Europe’s Energy Crisis

Author: Samantha Fanger

Oct 17, 2022

Image source: Samantha Fanger and Toghrul Aliyev

As winter approaches, Europe is facing an even greater challenge to combat an already looming energy crisis. The crisis is proving to be one of the most significant ripple effects of Russia’s invasion of Ukraine this past year. Russia, a key supplier of natural gas to Europe, has periodically shut down key energy pipelines to Europe in response to Western sanctions over its invasion of Ukraine. Consequently, energy prices in Europe have skyrocketed, leaving the EU to scramble for solutions. The EU continues to explore several options—they are already cutting back on energy usage by limiting things like air-conditioning usage, public monument lighting, and water heating.

“There’s no one answer to the European energy crisis. You have to look for a little bit in a lot of different places,” the founding chairman of the Global Energy Center and former U.S. Ambassadors to Azerbaijan and the European Council, Richard Morningstar said in an interview with CPC. He gave examples of critical areas to consider, such as green energy solutions and exploration of new technologies like hydrogen, but stressed that these solutions “will take a lot of time.”

One significant step the EU has taken to alleviate the issue at hand is turning to some of Russia’s neighbors in the Caspian region as an alternative source of energy. The promise of a strengthening relationship between the EU and Azerbaijan could prove to be a significant part of the solution to European energy needs.

On July 18, the European Commission and Azerbaijan signed a Memorandum of Understanding on a Strategic Partnership in the Field of Energy. Azerbaijan is set to double its annual natural gas exports to Europe by 20 billion cubic meters (bcm) annually by 2027. The Trans-Adriatic pipeline brought an estimated 8bm of Azeri gas to Europe. If all goes as planned, Azerbaijan will raise imports by 40 percent this year. European Commission President Ursula von der Leyen said Azerbaijan was a “key partner” in efforts to “move away from Russian fossil fuels.” After the inauguration of the Interconnector Greece-Bulgaria (IGB) pipeline on Oct. 1, Bulgaria, Romania, Hungary, and Slovakia offered to aid in Azerbaijan’s efforts to ship additional gas to Europe, with plans to transport one bcm of Azeri gas to Bulgaria. In 2017, the Statistical Review on World Energy reported that Azerbaijan had about 7 billion barrels (1Mt) in oil reserves, accounting for about .04 percent of global reserves. Azerbaijan also has the physical advantage in that pipelines do not need to pass through Russia in order for Azeri gas to reach Europe.

Geography is where Kazakhstan, another potential energy alternative in the Caspian region, is at a disadvantage. Kazakhstan has produced oil since 1911, with oil revenues accounting for about 35 percent of the country’s GDP. In recent months, Kazakhstan has had difficulties keeping gas exports up amidst Russian pipeline halts starting in March. Today, U.S. companies such as Chevron, ExxonMobil, and ConocoPhillips are large stakeholders in Kazakh oil reserves. However, the country’s membership in the Eurasian Economic Union (EAEU) allows oil exports to landlocked states via Russia’s port of Novorossiysk. Russia has continued to pressure Kazakhstan through the EAEU to harmonize gas and oil standards, allowing Russia ease in controlling gas export prices.  About 80 percent of Kazakh oil is exported through southern Russia, which in turn allowed Russia to limit and control Kazakh oil exports to Europe.

Russian blocks on Kazakhstan’s gas exports speaks to a more significant issue of great power intimidation in the region. Support for nations like Kazakhstan and Azerbaijan, which are willing to provide alternative energy support but are offset by Russian control over pipelines, could be a means of combating regional intimidation and helping the world meet its energy needs. Though Europe is facing the most direct impacts of the energy crisis now, it is a global issue with long-term economic and political repercussions.

Russia previously supplied about 40 percent of Europe’s gas, though some countries were more dependent on Russia than others. Countries like Germany are particularly pressed to find alternatives because of a disproportionate reliance on Russia for energy despite continued pledges to wean off it. The former U.S. Ambassador to the EU, Richard Morningstar recalled that Germany was particularly adamant about continuing to use Russian gas, taking the position that “getting gas from Russia was all commercial and didn’t recognize that there was a political overlay to it. You can’t separate the two; you have to take both into account. And they have finally admitted that they were wrong.”

At the same time, Morningstar and other experts believe that reliance on Russian energy has reached its permanent end because Russia continues to prove to be an unreliable source. This year, the EU withdrawing dependence on Russian gas by 80 percent and Shell plc announcing a “phased withdrawal” from Russian oil and gas are a few significant indicators of this. Countries that previously justified collaboration with Russia on the commercial energy front are now committing to alternatives and withdrawal as a matter of necessity. “There’s much more of a commitment today toward eliminating dependence on Russian energy than before the war in Ukraine,” Morningstar said. “They’re suffering because of it but I don’t think they will ever go back. I think Europe will stay united even though it’s difficult.”

“Replacing Russian gas supply is a long game, and one that Europe and the world was ill-prepared for,” Cekuta said. “Reliance on Azerbaijani energy is one way of alleviating some of that burden, but it is not the full solution.” The EU is also combatting energy shortages by increasing efficiency and reducing consumption. EU chief Ursula von der Layen called to cut peak electricity use by 5 percent. They are also weighing other alternatives like capping imports. Still, the costs of gas in Europe have increased more than six times the prices they were at this time last year –averaging at about €200 per megawatt-hour. Factories and businesses heavily reliant on gas are screambling to find solutions as fixed-cost energy contracts reach their end.

Reducing energy consumption and expanding relationships with countries willing and able to provide support are the immediate strategies for damage control. However, this is also an opportunity to look forward and begin implementing solutions for the future. The Caspian region has vast potential for renewable energy. These initiatives will take time, however, and “outside governments and companies should be looking beyond immediate needs and act on the region’s potential to help meet future global energy demands,” Cekuta wrote.

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