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Coal Increasingly Seen as Option for European Energy Security

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The Polish government, in particular, is pushing hard to expand Europe's consumption of coal.

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The crisis in Ukraine has thrust energy security to the top of the agenda in European capitals. With Russia accounting for almost one-third of Europe's natural gas, the prospect of the conflict escalating has stoked fears of a supply disruption. At the time of this writing, Ukrainian officials said that any crossing of the border by Russian troops would be viewed in Kiev as an "invasion," suggesting that the conflict could come to a head in the coming days or weeks.

While Europe's dependence on Russian gas has been on the decline for years, it's obviously not free of Russia's grip just yet. The standoff over Crimea -- and now the eastern provinces of Ukraine -- has Europe looking for alternatives. Ukraine is at the crossroads for a significant portion of European energy flows: Europe gets 16% of its natural gas from pipelines that pass through Ukraine.

Major Gas Pipelines Through Ukraine

As a whole, the EU gets about 40% of its gas and 20% of its oil from Russia.

Replacing Russian gas will likely include some combination of greater pipeline and electrical grid interconnections between countries, more LNG imports, renewable energy, and a push for the development of European shale gas.

Related Article: Threat of Tough Western Sanctions on Russia Unnerves US, EU Energy Firms

But a campaign to improve energy security could have coal at its core, despite many European governments' long-held goals to reduce greenhouse gas emissions. Coal is still a low-cost energy, and countries such as Germany and Poland are major producers. And although Europe has made major progress in its use of renewable energy, it has done so while keeping an increasingly nervous eye on Russia. As Ladka Bauerova writes in Bloomberg News, the energy security that coal provides may trump Europe's climate goals.

The Polish government in particular is pushing hard to expand Europe's consumption of coal. Poland produces 158 million tons of coal per year and consumes nearly as much, second only to Germany in both categories. And with coal accounting for 75% of Poland's electricity, it's not nearly as vulnerable to Russia's manipulation of energy supplies as other Eastern European countries are.

Polish Prime Minister Donald Tusk recently touted his country's relatively secure energy position to other European heads of government, as he tries to make coal a key plank in Europe's energy strategy. "We want the whole of Europe to acknowledge coal as a legitimate energy source," he said in a TV appearance on March 29. "Poland has been consistently proving that it can guarantee energy security."

With few other short-term options, chances are his viewpoint will hold sway in Brussels as the EU cobbles together its energy security road map, due out in June.

When US President Barack Obama visited Europe in late March, it appeared that European policymakers were pinning their hopes on the US exporting large volumes of liquefied natural gas (LNG) to undercut Russia's position. EU leaders, including German Chancellor Angela Merkel, pressed Obama to green-light LNG export terminals. Obama suggested that the EU could smooth the way to greater American LNG exports if a free-trade agreement with the US could be agreed upon. But beyond that, he advised Europe to do more to develop its own energy, reportedly saying, "You cannot just rely on other people's energy." In any event, liquid natural gas from the US is years away from becoming a significant export and is more likely to be destined for Asia when it does.

Related Article: Is Natural Gas No Better Than Coal?

European-produced shale gas -- once thought to hold promise -- is looking less like a solid energy option. The Polish government has been aggressively supporting the development of the shale gas industry, and its geology initially appeared to hold potential. Several big companies made investments in Poland a few years ago, but with nearly all of the wells coming up dry, ExxonMobil and Marathon Oil, among others, pulled out in 2012, and there have been few positive developments since.

That's not to say that Poland will ultimately fail to develop shale gas, but even if it succeeds, it would take years before commercial volumes are realized. Other nations, including France and Bulgaria, have implemented outright bans on hydraulic fracturing.

Renewable energy will continue to play an important role in Europe and already accounts for around one-quarter of Germany's electricity generation. But it will only incrementally be added to the grid, and in places such as Poland, where climate change isn't a priority, renewable energy could take a backseat.

That leaves coal, which many climate hawks in Europe had hoped to move beyond. But for a continent skeptical of fracking that's turning away from nuclear and looking to replace Russian gas, coal may end up having a longer shelf life than those hoping to address climate change previously thought.

This article was written by Nick Cunningham of Oilprice.com.
No positions in stocks mentioned.
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