Henry, Fran\ue7ois-Lo\uefc

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Research for this paper was carried out in the context of the SECURE project (Security of Energy 
Considering its Uncertainties, Risks and Economic Implications), funded by the European Commission 
under the Seventh Framework Programme. The project develops appropriate tools for evaluating the 
vulnerability of the EU to the different energy supply risks, and for promoting the optimisation of EU 
energy insecurity mitigation strategies, including investment, demand side management and dialogue 
with producing countries.  
François-Loïc Henry is a researcher at the Gulf Research Center Foundation in Geneva. CEPS Policy Briefs 
present concise, policy-oriented analyses of topical issues in European affairs, with the aim of 
interjecting the views of CEPS researchers and associates into the policy-making process in a timely 
fashion. Unless otherwise indicated, the views expressed are attributable only to the authors in a 
personal capacity and not to any institution with which he is associated.  
 
Available for free downloading from the CEPS website (http://www.ceps.eu)  
and the Secure website (http://www.secure-ec.eu) ? © CEPS 2010 
 
No. 220/November 2010 
Europe’s Gas Supply Security: Rating Source Country Risk 
François-Loïc Henry 
 
Introduction: Abundance at risk 
Europe is surrounded by abundant natural gas 
resources; physical availability is not in question. 
Beyond each EU country’s own supply vulnerability 
issues,1, the actual availability of supply in source 
countries might be hindered by their production 
policies, transit issues, or domestic or international 
conflicts. Geopolitical risks to future gas supplies from 
source countries to the EU exist both in theory and in 
reality, but basically two major types of risks need to be 
taken into account: source risks and transit risks. 
1. Source risks & ‘resource nationalism’ 
The term ‘source risks’ refers to armed conflicts, coups 
d’état, social disorder and so-called resource 
nationalism. These risks remain rather low in countries 
that already supply the EU, except in a few cases, such 
as Nigeria. In broad terms, the EU’s principal suppliers 
can be considered safe partners. The issue of resource 
nationalism in particular must be approached with care 
and understood factually rather than perceived through 
                                                     
1 See Andrew Macintosh (2010), Europe’s Gas Supply 
Security: EU Vulnerability, CEPS Policy Brief No. 222, 
CEPS, Brussels, November. 
an ideological lens. The biggest losers with regard to 
this phenomenon are international oil companies and 
not necessarily European end-consumers. The 2009 gas 
shortage in the Balkans can be considered an exception, 
although its main cause is more economic and 
commercial than political.  
Resource nationalism is no different from any other 
foreign policy issue in the sense that countries protect 
their interests, as they always have, in order to control 
their revenue flows and to meet social and political 
priorities. Thus they do not necessarily aim to use 
resources as weapons. The European Union must take 
this fact into account and integrate it in its foreign 
policy, and not consider resource nationalism a major 
threat. For the moment, there is no sign that a viable, 
OPEC-like natural gas cartel is emerging. Nor is one 
likely to in the future, for three main reasons. First, gas 
markets are likely to remain local (at the continental 
level) and dominated by long-term contracts, while a 
limited quantity will be traded freely on a spot market 
(which is a precondition for the formation of a cartel). 
Second, gas supplies are ample and it will likely remain 
a buyer’s market. Third, the countries that could form 
such a cartel do not share common interests and none of 
them has the capacity to play the role of adjustor, as 
Saudi Arabia does with oil. Parallel to these three 
reasons, it should be noted that source risks do not 
2 | François-Loïc Henry 
encompass the depletion rates and R/P ratios of 
producer countries’ reserves, factors that obviously play 
a role in the formation of any cartel. 
2. Transit risks 
Transit risks are much trickier to handle. They have 
been the cause of great concern in recent years and are a 
direct consequence of the physical nature of the gas 
trade. It could be argued that institutional frameworks 
are critical and necessary to address these risks. 
INOGATE and the European Charter Treaty, if properly 
implemented and respected, are appropriate tools that 
could prove effective at eliminating many uncertainties. 
Dealing with transit risks to Europe’s supply requires 
taking into account not only its own decreasing 
domestic resources but three external factors: 
• potential commercial conflict between Russia and 
Ukraine; 
• politics in Central Asia (the ‘Fourth Corridor’); 
• the evolution of global gas markets (the liquefied 
natural gas, or LNG, market and discoveries of 
unconventional gas in the United States). 
2.1 Russia and Ukraine 
In the Russo-Ukrainian crisis, it seems extremely 
difficult to untangle the legal responsibilities of each 
country. Aside from its bilateral contract with Russia, 
which must be made more stable over the long term, 
Ukraine did not fulfil the conditions of the Energy 
Charter Treaty (ECT). By refusing to resume the flow 
of gas before the contract with Russia was renegotiated, 
Ukraine breached its obligations. EU countries and 
institutions share responsibility for the escalation of the 
crisis, as they did not invoke the ECT. Such action 
would have been doubly effective: it would have sent 
the message to Ukraine that it was not behaving in the 
interests of all parties to the treaty, and it would have 
sent the message to Russia that the ECT can indeed be 
an enforceable and powerful tool. 
A solution to the problem could take the form of a 
tripartite consortium composed of Gazprom, Naftogas 
Ukrainy and public or private entities from the EU. The 
consortium would have the primary task of monitoring 
independently the volumes of gas entering Ukraine 
from Russia and leaving Ukraine. It could also mobilise 
funds to repair and improve the Ukraine section of the 
network and storage infrastructure. The most important 
point, however, is to emphasise the need for the EU to 
maintain stable relations with Russia, as the latter will 
remain the EU’s largest external supplier. As for Russo-
Ukrainian relations, they have drastically improved 
since the accession to power of the new Ukrainian 
president, Viktor Yanukovich. 
2.2 The Central Asian question 
In Central Asia, despite European and American 
eagerness to open up the region, the physical and 
geopolitical variables at play seem to have established a 
tripartite game between China, Russia and the Central 
Asian states, thus excluding European interests, as 
highlighted by the recent completion of the Atyrau-
Urumqui pipeline and its southern branch towards 
Uzbekistan and Turkmenistan (Turkmenistan-China 
pipeline). As the region’s main resources are located on 
the eastern side of the Caspian Sea, only three 
possibilities are on the table to supply Caspian gas to 
Europe over the long term: 
• through Russia, which is the case presently; 
• through Iran, as a pipeline connecting 
Turkmenistan and Iran and one connecting Iran 
and Turkey already exist (with small capacities) – 
but as of today this solution cannot be considered 
safe, owing to Iran’s political situation and its 
historical record of failed gas pipeline projects;  
• across the Caspian Sea (Turkmenistan-Azerbaijan) 
and into Turkey, a possibility which is not likely to 
become reality soon because the Sea’s legal status 
has not been settled. 
Moreover, most Caspian Sea bypass options require 
Central Asian countries to commit themselves to 
directly supplying the West, which cannot happen as 
long as no infrastructure is built, resulting in a double-
bind. Thus it is difficult to foresee a positive outcome to 
the Nabucco pipeline project in the short term, as it 
requires more supply than from Azerbaijan alone. 
Another option is a Nabucco pipeline through Iraq, but 
Iraq’s instability and the fact that such a pipeline would 
have to cross Turkish Kurdistan suggests its completion 
would be achieved in the far too distant future. 
2.3 The future of the global gas market 
The global gas market is likely to be influenced by two 
main factors: the development of the LNG market and, 
subsequently, the production of non-conventional gas in 
the US. LNG trade already represents 30% of the global 
gas trade and is likely to increase. The direct 
consequence of this will be the integration of regional 
gas markets and the creation of major in-take basins: 
the Atlantic basin and the Asia-Pacific basin. Resource 
competition between Europe and the US or East Asian 
countries could emerge, but as today’s resources are 
ample and likely to increase, this is not very probable.  
The characteristics of gas, its transportation 
requirements, and the cost of its exploitation are likely 
to favour close relationships between producer and 
customer – and hence long-term contracts – at the 
expense of the spot market. Consequently, an LNG spot 
market will certainly emerge and grow but will not 
replace traditional contracting processes. On the other 
Europe’s Gas Supply Security | 3 
hand, such a market could play the role of gas price-
setter, which could accelerate the decoupling of oil and 
gas and the decreasing of the share of oil prices in gas 
contracting formulas. 
The last months have seen a radical change in the LNG 
market with the decrease of American imports. The 
rapid exploitation of unconventional gas in the United 
States has already profoundly modified the face of the 
market and will continue to do so in the foreseeable 
future. Providing that the rate of both discovery and 
production of the American shale gas is sustainable, 
certain LNG projects in traditional producers (Russia 
and Qatar), could be postponed or abandoned. 
However, it seems wise to withhold long term 
conclusions from North American unconventional gas, 
as new environmental standards or geological realities 
could potentially put a halt to the expansion of this 
industry; this is particularly true if new environmental 
laws are voted. 
The global gas market’s evolution is therefore open to 
possibility, but the main trends affecting Europe 
(leaving aside the potential exploitation of its own 
unconventional gas) are likely to remain unchanged: 
diminishing domestic reserves and increasing 
dependency on imports (especially from Russia). 
3. Rating source country risk 
We rate producer country source and transit risks using 
a five-point scale representing risk levels of very low, 
low, medium, high and very high. Attributing numerical 
probabilities would prove inaccurate, not to mention 
unnecessary for establishing which sources are safe and 
which are not. 
In Table 1, most countries or pipelines rated as highly 
risky either do not supply the EU or are not active yet. 
However, certain projects that have received attention 
from the EC might prove hazardous and could involve 
significant geopolitical insecurity. This is the case of 
the Fourth Corridor, where countries or regions seen as 
important future sources can be considered unsafe, such 
as Iran and Iraq, or unreliable, such as Central Asia. We 
are therefore of the opinion that Nabucco might not be a 
viable project given current conditions. 
Table 1. Ratings of source country risk 
Country Source risk Transit risk Total risk
Algeria medium low low
Azerbaijan low medium medium
very high if via Iran high
high if via Russia high
high if via Trans‐Caspian high
Egypt low low low
medium if via Turkey high
low if LNG high
Iraq very high high if via Turkey high
Libya low very low low
low if LNG medium
very high if via Trans‐Saharan very high
Norway very low very low very low
Qatar very low low very low
high if no change medium
medium if either NordStream
 or South Stream 
or both are completed
medium
low if sustainable solution is 
found with Ukraine 
(consortium)
low
Russia low
Central Asia
(Turkmenistan,
Kazakhstan, Uzbekistan)
medium
Iran very high
Nigeria very high
 
Source: Own calculations. 
On the other hand, Norway, Algeria and Libya, which 
are already partners, can be considered safe. Russia is a 
special case, as its associated risk is mainly a transit risk 
and depends on infrastructure and political solutions put 
in place. Source risks are low, as Russia is not 
threatened by armed conflicts on its territory, faces 
limited instability, and has medium to low incentive to 
divert its supply away from Europe. Conversely, transit 
risks are likely to remain a characteristic feature of 
consuming Russian gas, owing to transit via Ukraine. 
Nord Stream will have a capacity of 51 bcm/yr and 
South Stream could have around 60 bcm. Even if these 
4 | François-Loïc Henry 
two pipelines are built, a sizeable share of the gas will 
still have to cross Ukraine. As mentioned above, the 
most desirable solution would be for the EU to engage 
in a tripartite consortium overseeing transit and to 
impose the resolution of disputes through the ECT. This 
could certainly allow Russia to be considered once and 
for all a reliable partner. The risk that Russia might 
increase exports to Asia at the expense of the EU should 
not be considered too seriously, as Europe has provided 
reliable and necessary cash flow to Russia, and building 
up export capacity to Asia to match that to Europe 
would take decades and require considerable 
investment. Moreover, the discovery and exploitation of 
new fields in Eastern Siberia is likely to produce 
enough gas to meet East Asian needs. 
Meanwhile, Nigeria should be treated with some 
caution, despite its potentially significant reserves. At 
the opposite end of the spectrum, Qatar offers all the 
advantages one could hope for; increasing imports from 
Qatar, if possible with long-term contracts, could foster 
diversification and security. 
4. Conclusions and recommended 
mitigation policies 
Considering the geopolitical risks, the overall situation 
of EU gas imports seems rather sound, but smaller 
Eastern European members face a more difficult 
situation. Several steps could be taken to alleviate the 
most negative effects of supply disruptions. These steps 
involve both upstream and downstream actions. 
• Diversification of gas supply sources should be 
promoted only to a moderate extent, as vigorous 
promotion could provoke a deterioration of 
relations with present suppliers. Qatar should be 
regarded as an attractive opportunity for 
diversification. The Fourth Corridor needs 
extensive political promotion upstream in Central 
Asia and requires that the geopolitical conditions 
in Iraq and Iran greatly improve. Alternative 
sources of energy (renewable) should also be 
promoted to increase the share of domestic 
energy sources. 
• LNG imports should be promoted and new re-
gasification plants built to allow greater 
flexibility of imports. This is particularly the case 
with Eastern Europe and the Balkans, where 
countries with sea access could play the role of 
receiving station for the rest of the region. For 
instance, the Gdansk-Athens axis is the most 
prone to disruptions. Therefore, if larger re-
gasification plants were present at both ends of 
the axis, and a gas grid was well connected to the 
landlocked countries, the situation could improve 
dramatically. Indeed, if necessary, additional gas 
flows provided by LNG imports could reach 
them quickly and securely. Either the South 
Stream pipeline or Nabucco and Yamal-Europe 
could also contribute additional capacity at both 
ends of the axis. 
• The EU’s internal gas network should be 
extended and storage facilities created. If the 
ensemble of EU legislative proposals known as 
the Third Energy Package is to exert broad 
influence, and if liberalisation of the gas market 
is to be effective, asymmetric capacities and 
possibilities of arbitrage need to be removed. 
Many EU border countries are not connected by 
pipeline. Reverse flow often does not exist, and 
as the major storage reservoirs are located in 
France, Italy and Germany, these stocks cannot 
be made available to Eastern Europe. 
Consequently, intra-European pipelines and 
equipment allowing reverse flows and 
supplementary storage capacities should be 
constructed. The Third Energy Package could 
only become reality if these steps are taken. 
Moreover, points 2 and 3 are decisive measures 
for the successful implementation of the N-1 
standard. Each member state should also draw up 
a list of entities (private firms, energy-intensive 
plants, public institutions) that should never 
suffer a gas disruption and those that could 
eventually be deprived of gas momentarily 
without negative consequences for the economy 
and the population. This would help redirect 
energy to where it is most vital. 
• The Energy Charter Treaty should be strongly 
supported and EU countries should be the first to 
appeal to it, which will prove its effectiveness to 
unconvinced third countries such as Russia. In 
certain cases, ad hoc legal frameworks and 
regimes could be employed, such as an 
international body controlling gas transit in 
Ukraine. 
• Finally, dialogue with producer countries is 
essential. The EU will become 80% dependent on 
imported gas in the coming decades. While 
relations based on mutual dependence can bear 
fruit, trust should also be present. Analysis has 
shown that Russia, which shares responsibility 
for the events of the 2009 winter, has much to 
lose in a degraded relationship with the EU. The 
latter should thus consider Russia a special 
partner and work with it to insure that no 
disruptions occur and that necessary investments 
in Russia are delivered. The EU should also 
prove itself a reliable customer. Indeed, it cannot 
ask Russia to be more committed to constant gas 
exports and at the same time claim that it wants 
to diversify away from Russia. Platforms 
allowing dialogue would be beneficial to the 
EU’s energy security and would help undermine 
producer countries’ motivations to form a cartel. 


Europe\u2019s Gas Supply Security: Rating Source Country Risk

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