Ukraine Crisis: Time for Europe to give (clean) coal a bigger share

Did anyone of us ever think that switching from coal to imported gas could pose a major risk to the security of energy supplies in Europe?

At least six European countries rely exclusively on one country for natural gas supply – Russia. During a recent press conference Donald Tusk, the Polish prime minister called for changes in the EU energy policy and added that “Germany’s dependence on Russian gas may effectively decrease Europe’s sovereignty”.

EU relies on Russia for 30% of its natural gas imports, with 80% of that delivered through Ukrainian pipelines. Ukraine is a major gas transit nation for supplies from Russia to EU. Earlier this month Russia warned it could stop distributing gas to Ukraine over unpaid bills and any such move can have dramatic consequences for the EU.  With Europe’s main natural gas supply route at risk this provides the policy makers in the EU re-think and direct more attention to Europe’s indigenous coal resources as well as secured and reliable coal imports.

Source: BBC News

Coal accounts for 90% of the EU’s fossil fuel energy and natural gas accounts for only 7%. Hence, it is not surprising at all that Europe imports almost 70% of its natural gas and as per a report from European Commission it will have to import close to 80% by 2030.

Coal continues to remain integral to EU, as it creates jobs, keeps the domestic producers in business and more importantly reinforces the continent’s energy security. Imported coal has been a reliable source of energy for Europe. Unlike natural gas coal imports are not dependent upon transport infrastructure such as LNG terminals or pipelines so any drop in supply from one country can be easily filled by another supplier. Currently, 60% of EU’s coal imports come from the USA, South Africa, Australia & Colombia & 25% is sourced from Russia.

There is a strong security argument against over-reliance on natural gas imports from Russia and this should be given more attention in the EU’s 2030 framework for climate and energy policies. None of the targets, measures & policies proposed as part of this package should force Europe into a position where it is slowly abandoning the most abundant, affordable and secure energy fuel it is endowed with to the benefit of imported natural gas.

Ukraine - China to the Rescue ?

Ukraine prior to the crisis:

• Aging industrial sector, eastern Ukraine, primarily engaged in manufacturing of steel for Russia
• Elephant size debt of USD 35 billion
• A politically and ethnically divided population
• The private sector mainly or fully controlled by oligarchs
• Endemic Corruption
• Massive Inequality (the rich are too rich and the poor too poor)
• Energy Crisis
• Low foreign reserves mainly due to poor export figures

The US and IMF has offered billions of dollars, contingent on energy subsidies & opening up the economy. Ending energy subsidies is to ensure that the loan amount facilitated by the West does not end up in Russian banks as Ukraine is reliant on Russia for its energy needs. However, ending energy subsidies also means close to double increase in price of energy, which means many Ukrainians would freeze next winter and the aging industries would go out of business. The EU bloc will not do a favor buying not so competitive goods.

Ukraine was the fourth largest corn exporter in 2012-2013, behind Brazil, the US and Argentina. It is also the sixth biggest supplier of wheat and exported 7.1 million tons in 2012-2013. The financial crisis may affect the production of crops with farmers having trouble to pay for fertilizer, after the Ukraine’s currency decline against the dollar.

In the current scenario, the survival for Ukrainians lies in the production and export of grains. The country which has expressed interest in Ukraine’s grains is China. Ukraine is expected to become China’s largest overseas farmer in 3 million hectare land (i.e. 7% of Ukraine’s land). China cannot grow enough grain to feed its billion+ population. The good thing about the Chinese is that they don’t mingle with the internal affairs of the countries where they develop infrastructure. Their funding and support is not contingent on beneficiary countries engaging in the sort of austerity that the IMF, Europe and the US prefer to impose on any country who goes them for financial support. For China, food security for the future generations is critical and it will be ready to pay a premium for the same.

Ukraine has got two core issues; one is debt and the other is inequality. The West will not allow a massive restructuring on default of debt & yet rain dollars. Ukraine cannot even afford to cut its ties with the Russians as it is heavily reliant upon Russia for its energy needs. Ukraine will have to maintain friendly ties with Russia to secure gas supplies at discounted rates. Ukraine will have to turn to China and improve its productivity and head to become the biggest exporter of grains.

Let me summarize the above in a manner where it becomes easier to understand the dynamics surrounding Ukraine post Crimea annexation. Ukraine’s western back government will soon have to put more focus in diplomacy with Russia and furthering ties with China than relying on Europe and the IMF who have no history of pulling out ordinary men from unemployment and poverty.