By David Maršanić
The Croatian government approved last January the funding for the construction of a floating LNG (Liquid Natural Gas) terminal on the island of Krk. The cost of the project is estimated at around 234 million euros, 100 million of which will be funded by the European Union, and the rest by the Croatian government and its owned companies.
The floating LNG terminal would allow natural gas to be transported via tankers across the Mediterranean, thus lessening the dependence of Central and Eastern Europe (CEE) on Russian exports. Croatia would be the third CEE country, after Poland and Lithuania, to build an LNG terminal.
Croatian minister of Environmental Protection and Energy Tomislav Čorić stated that the planned LNG terminal will have the capacity to meet 100% of Croatian natural gas needs, should it be required.
What remains to be seen is whether this move towards energy independence will ease or increase tensions in Eastern Europe. LNG terminals would render CEE countries less dependent on Russia, while the North Stream 2 (a proposed pipeline from Russia to Germany across the Baltic Sea) would make Russia less dependent on shipping gas across potentially hostile CEE countries.
The energy needs of a country can be seen through the trade-off between energy security and the price and other perceived advantages. Any country would prefer its supply of energy be unaffected by the affairs of foreign states. Many energy exporting states are in a position of a geopolitical turmoil, from the Gulf states and Iran to Russia and now Venezuela.
Yet few states, that are not themselves blessed by abundant natural sources on their soil, are in a position to be able to afford energy independence. The so called “renewable sources” are still not economical, and nuclear energy carries its own risks. What many see as a second-best solution is to eliminate its dependence on energy from a single source. That is the position in which CEE countries are in respect to Russian natural gas. Such dependence gives rise to particular risks, which can be alleviated by the construction of LNG terminals.
The gas from LNG terminals is more expensive than pipeline gas, but it is not tied to a single supplier, so it provides greater energy security. Of course, Anvar Azimov, the Russian ambassador to Croatia, stated that, while not being opposed to the construction of the LNG terminal, Russia is still in the position to provide the cheapest natural gas to Croatia.
Much of the risk associated with supply of Russian natural gas to Europe comes from the relationship between Russia and Ukraine. The fist dispute was in 2005-2006, when Russia accused Ukraine of diverting natural gas intended for other countries for domestic use.
The dispute resulted in Russian reductions, which caused shortages in other European countries. The substantial volume of Russian gas exported to Europe had to pass through Ukraine, and Russia could not cut off Ukraine without causing shortages in the rest of Europe. In 2014, Russia cut back its gas supplies to Austria, Hungary, Poland and Slovakia, after a dispute with Ukraine. Russia imposed reductions on these countries forcing them to stop shipping gas to Ukraine, thus improving the Russian negotiating position. At that time, pro-Russian separatists were already in in control of a large area of the Donbass region and Ukraine was not fulfilling its contractual obligations with Russia.
So far it seems that there is little proof that Russia has used the threat of gas reductions to further its geopolitical aims. Russia seems to rely on the revenue it receives from its gas exports almost as much as CEE countries rely on the supply of Russian natural gas. In 2017, oil and gas accounted for almost 40% budget revenue, and oil and gas made up 63.2% of Russian exports.
But investments in the North Stream 2 seem to indicate that Russia is willing to increase its exports of natural gas to Europe. Yet, it is possible that it could exercise influence by cutting of individual CEE countries, especially after the North Stream 2 has been build, offering a route that bypasses Poland and Ukraine. Such reductions would not seriously impact Russian revenue. In that case, countries owning LNG terminals could relieve the pressure and face the reductions.
While LNG gas is likely to remain more expensive than Russian gas, it may provide indirect economic benefits. An ability to negotiate with more than one provider can improve the bargaining position of a country, and thus lead to lower prices of Russian gas. Even mere potential competition in the future can have a substantial effect on present prices.
What remains not clear is the role the US has to play in this matter. It is not likely that the US will export much liquid gas to CEE countries. Norway and even the Gulf states are much closer. Yet, the US has decided to support the LNG project in Croatia. Wess Mitchell, US Assistant Secretary of State for European and Eurasian Affairs stated that
The United States appreciates Croatia’s contribution to global security and its efforts regarding the European Union’s energy diversification
With the talk of sanctions against the North Stream 2, it seems that the US believes to have the interest to weaken Russia in any possible way. Such a policy, however, does not have many supporters in Europe, especially among key players such as Germany.
It seems that both the LNG terminals and the North Stream 2 could create safer positions for all the countries involved, and could reduce the risk each party perceives. Both the LNG terminals and the North Stream 2 are better suited as safety measures against unfair treatment, then as instruments that allow one to mistreat the other party. And once the parties will be convinced that they are relative safety in their positions, we can expect an improvement of the relations between them.
(The views expressed in this article belong only to the author and do not necessarily reflect the views of World Geostrategic Insights)
Image Credit: LNG Croatia LLC