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01-15-09 - Downstreamtoday.com - Russia's dispute with Ukraine over gas payments has stoked fears among Europeans of being left without heat in the dead of winter, yet the European Union's inevitable scramble to seek new supply routes may actually end up increasing its dependence on Russia. The running two-week disruption in Russian gas supply to Europe via Ukraine raises pressure on E.U. governments to push ahead with those proposed gas-pipeline projects that have the highest potential. Although those projects eliminate the transit hurdle by skirting Ukraine, they still source their natural gas supplies from Russia, energy researchers and consultants say. What's more, a recent E.U. push to cut greenhouse gases within the 27-member bloc could encourage coal-dependent countries to switch to Russian gas. The E.U. "will continue to rely heavily on Russia to cover its gas supply, and (Russian) imports to Europe will continue to rise," said Florian Haslauer, vice president for energy at consulting company A.T. Kearney. The E.U. now counts on Russia for roughly a quarter of its overall gas supplies, with 80% of it flowing through Ukraine. Supplies fell in 12 countries when OAO Gazprom (OGZPY) closed the taps earlier this month. Gas still wasn't in transit on Thursday, even after a week of negotiations and a signed agreement on how international observers would be deployed to oversee the flow. While heavier dependence on Russia isn't negative in itself, it will reduce the E.U.'s energy security through an over-reliance on a single large supplier. "We need to have diversity in the portfolio," Haslauer said. Russia's gas may end up accounting for 38% of European consumption by 2020, he said. The pipeline most likely to be built soon is Nord Stream, which would run under the Baltic Sea and bring gas directly to Germany from Russia, said Arno Behrens, research fellow for energy and environment at the Center for European Policy Studies, a Brussels-based think tank. Gazprom holds 51% of the joint venture created to build the Nord Stream pipeline, which is scheduled to start operating in 2011. Another proposed pipeline, known as South Stream, would offer a slight geographic alternative by bringing gas from Russia to Bulgaria - the hardest-hit country in the current spat - under the Black Sea. Italian oil and gas company Eni SpA (E) and Gazprom are jointly developing the project, which is expected to begin operations in 2013. The European Commission considers a third project, the proposed Nabucco pipeline, to be a priority. The 3,300-kilometer connection would bring gas from Central Asia to Austria, bypassing Ukraine and softening Europe's reliance on Russia. Some experts are skeptical about the effective potential the Nabucco project could have in the short to medium term. "Our research suggests that there will not be enough gas available from the Caspian/Middle East region to fill a 30-billion-cubic-meter pipeline before 2020" because it will take time to develop the fields in the region, said Jonathan Stern, director of gas research at the Oxford Institute for Energy Studies in England. Nabucco is bound to compete for scarce gas in Azerbaijan, from which a pipeline known as ITGI has been pumping Azeri gas to Greece via Turkey since 2007. Italian energy company Edison SpA (EDN.MI), ITGI's main partner and a smaller Eni competitor, wants to extend the ITGI pipeline to southern Italy, aiming to supply about 10 billion cubic meters of the Azeri gas a year to southern Europe. The European Commission increased its push to differentiate energy supplies last summer after a conflict between Russia and Georgia broke out, raising questions about the reliability of connections with the region. Energy Commissioner Andris Piebalgs traveled to Africa and showed the commission's political support for the Trans-Saharan Gas Pipeline, a project designed to bring gas from Nigeria to the Mediterranean and eventually to Europe. Africa's role is, however, likely to remain limited, providing about 20 billion cubic meters, mainly from Algeria, in 2020, Haslauer said. Gas from the North Sea, as well as imports from Norway, won't play a big role either, Haslauer said. Norway will be able to increase its supplies only marginally, he said. With both Nord Stream and South Stream in place, an additional 70 billion cubic meters per year would come from Russia in 2020, Haslauer said. Russian gas imports to Europe could increase to 193 billion cubic meters per year from 121 billion per year, he said in a study published Wednesday. The E.U. consumes 505 billion cubic meters per year. Gas use in Eastern Europe may also rise in the future, as countries such as Poland switch to gas from coal to cut emissions, further increasing dependence on Russia, Behrens said. "Gas is an option for countries like Poland as a transition resource," before increasing use of renewables, Behrens said. By 2020, European countries have to cut carbon emissions by 20% on average compared with 1990 levels, according to a recently approved E.U. law. One factor that could gradually reduce the E.U.'s reliance on Russian gas is the commission's focus on boosting the use of renewable energy and increasing energy efficiency. This crisis "is a huge opportunity for the E.U. now to develop substantive domestic clean energy sources such as offshore wind, solar power and clean biomass," said Stephan Singer, international director for energy at environmental organization WWF.