By John Browne, Lord of Madingley and former CEO of BP, a special contributor to TheStreet
LONDON (TheStreet) -- When I was CEO of BP (BP - Get Report), I met regularly with Vladimir Putin to discuss BP’s investments in the country. There was a routine: The President would say or do something to seize the upper hand. In response, we would submit the same four-point agenda at every meeting in an effort to introduce some calm and regularity. It was important not to overreact. The same is true today when it comes to the geopolitics of energy. As a major oil and gas supplier to an energy-dependent Europe, Russia appears to have the upper hand when it comes to its conflict with Ukraine and the prospect of European sanctions. But the reality is more complex and Europe is in a stronger position than some commentators are suggesting.
The European Union obtains around one third of its gas from Russia, with half of that flowing through Ukraine. But beneath that total lies wide variation. The UK, for example, is independent of Russian gas. Germany relies on Russia for around one third of its total supply, while the Baltic States and Finland are wholly dependent on Russian supplies. The technology exists to even out such imbalances, and it is already being used. European gas inventories, for example, are at a three-year high for this time of year, providing a buffer in case of shortages. And when Russia halted supplies to Ukraine earlier this year, neighbouring EU states sent some gas back to Ukraine via reverse-flow pipelines. Investment in interconnectors, reverse-flow pipelines and storage sites, as well as accelerating the completion of the internal energy market, will create options for countries in need.
Europe also has the ability to make much greater use of its LNG import facilities. Due to falling gas demand in Europe and surging demand in Asia, these facilities have been operating at just 25% capacity as LNG cargoes have gone elsewhere. But mild weather, growing stockpiles and the prospect of a return for nuclear power mean that Asian demand has fallen, taking the spot price of LNG in the region to a three-year low of less than $11 per million British thermal units. At that price, internationally traded LNG cargoes can compete against Russian pipeline gas. If LNG utilisation levels reached their historic high of 70%, and if Europe were willing to pay the associated price, it could displace two thirds of its imports of Russian gas. If the U.S. starts to export a significant proportion of its abundant gas supplies, then the prospects for LNG in Europe become better still.
In the long term, the surest route to greater energy security is for Europe to develop its own lower-cost resources and to consume less of them. The continent already leads the way when it comes to renewable energy, which has made significant inroads in the power sector. Thanks to generous government subsidies, renewable sources now account for more than 20% of electricity generation, taking gas demand down to levels last seen in 2002. If those gains are to be sustainable, and if renewable energy is to exist without subsidies in the future, governments must now spend less money supporting the production of renewable energy and more on R&D to bring down the cost of renewable energy technologies.
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Click below to watch Lord Browne's discussion with TheStreet about Putin and Ukraine: