John Browne: Europe Has Energy Options to Loosen Putin's Grip

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), 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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But Europe will need more than renewable energy to reduce its dependence on Russian gas. Estimates of Europe’s shale gas resources suggest that they could supply between 10% and 30% of the continent’s current annual consumption by 2035, enough to displace a significant proportion -- perhaps all -- of imports from Russia at an apparently lower cost than imported pipeline gas or LNG. That will not happen by default. Regulators and lawmakers will need to demonstrate a commitment to constructive regulation which permits the safe and expeditious development of Europe’s shale gas resources. There are signs that the continent is moving in the right direction: Germany has signalled its intent to allow fracking to resume, while the UK is simplifying some of the regulatory process. But there is much more still to do. In return, prospective operators must recognise the need to build a culture of transparency and trust, at a time when the public is deeply suspicious of the energy industry. That will require meaningful programs of community engagement and an unremitting commitment to demonstrating the positive economic and environmental impact that a shale gas industry can have.

In my experience, President Putin is consistently pragmatic. With the Russian government budget so finely balanced, Putin cannot afford in the long term to lose the 15% of Russia’s export revenue that come from sales of gas in Europe. He also knows Europe has an increasing array of energy options. European governments, regulators, companies and consumers must now demonstrate their willingness to embrace those options. As Winston Churchill reminded Britain on the eve of the First World War, energy security lies in "variety and variety alone."

-- By John Browne, Lord of Madingley 

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

John Browne, the Lord Browne of Madingley, was voted Most Admired CEO from 1999 to 2002 by Management Today. He led BP from 1995 and continued as CEO after the merger with Amoco in 1998 until 2007. He served as president of the Royal Academy of Engineering from 2006-2011 and is currently a partner of Riverstone. He is also currently chairman of the board of trustees of the Tate Gallery.

Browne serves on the Boards of Directors of Cuadrilla Resources, Fairfield Energy, Pattern Energy Group Inc., and White Rose. He was Chairman of the Advisory Board of Apax Partners LLC from 2006 to 2007. He was a non-executive director of Goldman Sachs from 1999 to 2007, a non-executive director of Intel Corporation from 1997 to 2006, a Trustee of The British Museum from 1995 to 2005, a member of the Supervisory Board of DaimlerChrysler AG from 1998 to 2001, and a non-executive director of SmithKline Beecham from 1996 to 1999.

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