Russia's Energy Relationship with the European Union
Updated: Jul 4, 2021
Relations between Russia and the European Union have long been uneasy. Geopolitics continues to be a source of tension, and the anxieties of the Cold War seem never to have completely disappeared from view. However, the two entities have built a partnership of economic convenience, based largely on the economic strength of the EU and the status of Russia as a major producer of hydrocarbons.
This notebook aims to quantify that relationship and in due course, reveal its importance to the economies of both the European Union and the Russian Federation.
The Scale of the Relationship
The importance of the EU-Russia energy relationship can be seen in the sheer volume of hydrocarbons that the EU imports from Russia, as well as the reliance of the EU economies on hydrocarbons themselves.
This figure shows the mix of total energy available in the European Union in 2019. Fossil fuels account for 71.4% of energy available, with petroleum (crude oil) products remaining in the lead.
The dependency rate (the proportion of total available energy that comes from net imports) of the EU as a whole stayed relatively constant from 2008-2018, even rising significantly in the case of natural gas (by 13.1 percentage points). Over the period shown, the overall dependency rate decreased slightly from 58.4% to 58.2%. This means that the EU has consistently depended on net imports for more than half of its energy consumption.
In 2019, Russia provided 26.9% of the EU's imports of petroleum/crude oil. If we assume constant energy dependency between 2018 and 2019, this means that in 2019, the EU relied on net imports for 94.6% of its petroleum product consumption. This would mean that the EU relied on Russian crude oil imports for 25.4% of its petroleum product consumption, or 9.3% of its total energy consumption in 2019.
In 2019, Russia provided 46.7% of the EU's imports of solid fuel (coal). If we assume constant energy dependency between 2018 and 2019, this means that in 2019, the EU relied on net imports for 43.6% of its coal consumption. This would mean that the EU relied on Russian coal imports for 20.4% of its coal consumption, or 2.6% of its total energy consumption in 2019.
In 2019, Russia provided 41.1% of the EU's imports of natural gas. If we assume constant energy dependency between 2018 and 2019, this means that in 2019, the EU relied on net imports for 83.2% of its natural gas consumption (this would be higher if the upward trend were extrapolated). This would mean that the EU relied on Russian natural gas imports for 34.2% of its natural gas consumption, or 7.7% of its total energy consumption in 2019.
Taken together, these data suggest that the EU as a whole depends on Russian hydrocarbon imports for roughly 20% of its total energy consumption.
Natural gas imports in particular reveal a heavy dependence for certain countries around Russia's periphery.
This graphic from 2018 reveals drastic variations within the EU of dependence on Russian imports for supply of natural gas. We find a dependence of over 75% for Finland, Estonia, Latvia and Bulgaria, as well as the non-EU countries of Belarus, Moldova, Serbia and North Macedonia.
This interesting graphic from June 2014 reveals that at that time, Bulgaria, Finland and the Baltic states of Estonia, Latvia and Lithuania were all dependent on Russian natural gas for 100% of their gas usage. For the Baltic states, this position of total dependence would endure until 2015.
Given this enormous dependence on Russia for energy consumption - roughly 20% for the EU as a whole in 2019 - it may be interesting to explore why Russia and the EU are so closely linked with regard to energy.
Partnership of Convenience
Nemanja Popovic, a scholar of Russia's energy relations, contends that "[the EU] will remain locked to Russia in the short-term for three reasons: geographical proximity, existing infrastructure and Russia's energy volumes". To this, we might add the combined scale of the European Union's economies.
According to the CIA world factbook, the estimated combined GDP of the EU in 2019 was US$19.9 trillion, putting it behind only China (US$22.5 trillion) and the United States (US$20.5 trillion), when measured in terms of purchasing-power parity. By comparison, the GDP of Russia was only US$4.0 trillion. Vitally, one common feature of enormous economies such as that of the EU is that they tend to require copious amounts of energy.
Russia's usefulness lies in its capacity to provide this energy in the form of hydrocarbons. One element of this capacity is the sheer quantity of hydrocarbon reserves and production in Russia - Popovic's "energy volumes".
Russia has substantial oil reserves (BP reports this figure to have risen to 107.2 billion barrels by the end of 2019).
Russia's reserves of natural gas are perhaps even more impressive (BP quotes a slightly lower figure of 1340.50 trillion cubic feet at the end of 2019).
Russia's production of petroleum/crude oil and natural gas has similarly been in the top bracket of petro-states. One British thermal unit is approximately equal to 1,055 joules.
Furthermore, Russia's ability to export hydrocarbons such as crude oil is underpinned (and perhaps reflected) by the difference between its production and its domestic consumption. According to data given by BP, the oil production and consumption statistics for Russia, the United States, Saudi Arabia and the EU in 2019 are as follows:
Production = 11,540,000 barrels per day (bpd)
Consumption = 3,317,000 bpd
Production - Consumption = 8,223,000 bpd
Production = 17,045,000 bpd
Consumption = 19,400,000 bpd
Production - Consumption = -2,355,000 bpd
Production = 11,832,000 bpd
Consumption = 3,788,000 bpd
Production - Consumption = 8,044,000 bpd
Production = 1,531,000 bpd
Consumption = 12,913,000 bpd
Production - Consumption = -11,382,000 bpd
As can be seen, the spare production gap for Russia is very high - higher than that of Saudi Arabia, in fact. This means that at current levels of production, Russia is able to export a very large quantity of crude oil to oil-hungry markets such as that of the European Union (which requires net imports of 11,382,000 barrels per day to sustain its consumption). The United States, though the largest producer in the world, is also by far its largest consumer, hence, unlike Russia, it is forced to import (in 2019, according to the same BP document, Russia's daily crude oil imports amounted to less than 500 barrels per day, whereas the United States imported 6,796,000 bpd and "Europe" imported 10,494,000 barrels per day). The key point of all this is that Russia has the goods to deliver.
Popovic also highlighted Russia's "geographical proximity [and] existing infrastructure" vis-à-vis the EU. This "existing infrastructure" probably refers at least in part to the massive system of pipelines siphoning oil and gas from fields in Russia to terminals and refineries in Europe.
Infrastructure and Geography
The network of pipelines supplying Russian crude oil to Europe. The mighty Druzhba ("friendship") pipeline, the longest oil pipeline in the world, was initially constructed in 1964 to shuttle oil to the Eastern bloc countries of Poland, Czechoslovakia, Hungary and the German Democratic Republic. Now it supplies Ukraine, Belarus, Poland, Hungary, Slovakia, Germany and the Czech Republic.
Source: S&P Global Platts
The system of pipelines feeding Russian natural gas into Europe. The Nord Stream system of pipelines have recently been a major source of contention with the United States given the perceived geopolitical leverage it would grant Russia. Nord Stream is owned and operated by Nord Stream AG, 51% of which is owned by Russian state company Gazprom. Nord Stream 2, currently under construction, would fall fully under the ownership of Gazprom.
Source: Jamestown Foundation
These pipelines are significant because they appreciably facilitate the transfer of oil and natural gas from one place to another, once established. Regarding natural gas, a report from the UK's Department for Business, Energy and Industrial Strategy notes that for the EU, "most imports arrive via pipeline because the infrastructure is well-established, and this is a cost-effective way of transporting gas", as opposed to transportation via shipping, which requires the cooling of the gas to form "liquefied natural gas" (LNG). As such, in 2019, LNG accounted for only 22% of the EU's total natural gas supply, whereas pipeline imports accounted for 55%. The fact that Russian pipeline imports account for 27% of the EU's total supply could be attributed to this well-established infrastructure.
Crude oil, being found in liquid form, does not require condensation before transportation via shipping. As such, in 2016, more than 80% of Russia's crude oil exports were seaborne (though these still had to traverse Russia's internal pipeline system to reach the ports). However, even here, Russia possesses certain advantages as a result of its geography. In particular, the shipping times between major Russian ports and major EU ports are far less than the corresponding shipping times between the EU and another set of potential competitors - the significant hydrocarbon producers of the Middle East.
The following segment uses the SeaTraffic shipping website to calculate transit times between the top four western Russian ports - Novorossiysk, Primorsk, Ust-Luga and Murmansk - and major ports in the four largest European recipients of Russian crude oil - Rotterdam (Netherlands), Hamburg (Germany), Gdańsk (Poland) and Trieste (Italy, not in the largest four but used to represent the Mediterranean). It then repeats this calculation with major ports in the largest Middle Eastern oil producers (barring Iran) - Jebel Ali (UAE), Jeddah (Saudi Arabia), Basra (Iraq) and Kuwait (Kuwait).
Given these assumptions and ShipTraffic's calculations, a representative average transit time between Russia and Europe could be calculated to be 9.7 days. The corresponding average between the Middle East and Europe is 22.4 days, more than twice as high. The significant outliers in the tables above are the transit times concerning Italy, due to its position in the Mediterranean rather than Europe's north flank. This means that Trieste is generally further from Russia than the northern ports, except in relation to the Russian Black Sea port of Novorossiysk. This also makes Trieste significantly closer to Middle Eastern ports, especially Jeddah, which is located on the Red Sea rather than the Persian Gulf (as Jebel Ali, Basra and Kuwait are). In general, however, it seems as if Europe's major shipping ports are generally more easy accessible by Russia's major ports rather than those of the Middle Eastern oil producers, granting Russia a geographic advantage vis-à-vis the Middle East with regard to the shipment of hydrocarbons to Europe.
We have explored why Russia might be a suitable source for European imports of hydrocarbons - however, this dependence is not one-sided. As Popovic states, "at this point in time, Russia needs the European Union, and the European Union needs Russia. Europe meets its energy needs. Russia's hydrocarbon exports generate a substantial amount of revenue for the state".
That statement can be decomposed into two key points. The first is that the European Union accounts for a large share of Russia's exports of oil and natural gas.
Export data from 2016. The "OECD Europe" countries directly named (which are all in the EU) already account for 2,637,000 bpd (50.0%) of Russia's total crude oil exports. Aside from this, we have the EU member states of Lithuania and Bulgaria, which add another 251,000 bpd (4.8%). "Other OECD Europe" includes the non-EU countries of Iceland, Norway, Switzerland, Turkey and the United Kingdom.
Export data from 2016. The OECD Europe countries directly named that are in the EU (that is, all of them except for Turkey and the United Kingdom) collectively account for 48.0% of Russia's natural gas exports. Adding "Other OECD Europe" (which includes the non-EU countries of Switzerland, Iceland and Norway) tips it to 56.0%.
The key message is that Russia relied on the European Union for roughly half of its exports of petroleum and natural gas (its exports of coal - not shown but available here - show less of a bias toward Europe. Curiously, Asia and Oceania accounts for a far larger slice of Russian coal exports, around 47.0%).
The second point is that oil and gas revenues account for a significant portion of Russia's federal budget and GDP. These revenues accounted for no less than 36.0% of the federal budget in 2016 and 28.0% in 2020, presumably propelled in part by the Russian government's stake in the energy behemoths of Rosneft and Gazprom. In 2017, hydrocarbons provided "25% of GDP and 39% of the country's federal budget revenues, 65% of foreign earnings from exports, and almost a quarter of overall investments in the national economy", according to Tatiana Mitrova and Yuriy Melnikov of the Oxford Institute for Energy Studies.
These statistics reveal the sheer scale of the economic interdependence between Russia and the European Union, particularly in the realm of energy. The European Union relies on Russian hydrocarbon imports to power its fuel-hungry economy; these imports accounted for around 20% of the EU's energy use in 2019. Conversely, Russia relies on the European Union as an export market for its vital and strategically important hydrocarbon industry. This is seen in the fact that the EU accounted for roughly half of all Russian oil and gas exports in 2016.
What is missing from this account is any mention of geopolitics and the way that hydrocarbon transfers can factor in the relative balance of power between Russia and the European Union. The enormous topic that that is, it may have to be left to another notebook.