An analysis of European gas addiction with Russia

European policymakers and citizens should view the Russian-Ukraine conflict as a moral reflection of the policy choices they have made in the last two decades. For so long the European Gas consumers have funded the bad behaviour of Moscow. The European energy policies must be aimed to reduce the dependency on Russian gas at some cost, and the best time to realise it is not in the next five or ten years, but right now.

Source — Unsplash

Getting the basics right (for beginners).

• There is no world market for gas like oil because gas is an infrastructure dependent commodity. You either need pipelines to make the transmission or expensive LNG gasification/ re-gasification terminals to convert gas to liquid natural gas (LNG) or vice versa.
• There are different international markets for LNG, but their prices vary significantly depending on their shipping costs.
• Russia exports to the EU via the following pipelines: Nordstream (directly to Germany via Baltic Sea), Ukraine transit, Yamal Pipeline via Belarus/Poland, Turkstream (via Turkey). And also using LNG freights.
• Transiting gas via Ukraine suggests Russia’s dependence on Ukraine’s favour to conduct business with Europe.
• Russia exports a substantial part of its gas to Europe and other small customers like China & Japan.
• Europe has a vibrant internal gas market with pipelines connecting countries. What is more interesting to us is the total dependence of Russian gas on Europe than how each country depends on it.

Source — Bruegel

The following six points will show the ground reality of European gas addiction with Russia and their way forward.

1. Gas imports from Russia to Europe.

• The share of gas (LNG + Gas) of Russian origin is 43% in Q3 2021 (before crisis escalation). Vulnerable position.
• Major EU economies, like, Germany, Netherlands and Italy, post an increased Russian dependency in the last few years.
• With the nuclear phase-out, its commitment to phase out coal-fired power, and diminishing supply from the neighbouring gas fields means, Germany expects a significant rise in gas demand in coming years.
• But instead of diversifying its supply, Germany supported building new Russian owned pipelines, Nordstream 1 & 2 and has dragged the whole of Europe to more dependence on Russian gas.

Source — New York Times

2. Strange behaviour of Gazprom.

• Gazprom is a Russian majority state-owned gas company and is the largest exporter of natural gas to Europe. Its website says, “the main goals of Gazprom in the European market are retaining its leadership position”. However, in 2021 they changed their strategy from maximising market share to maximising profits showing monopolistic traits.
• In the second half of 2021, Gazprom booked less than expected additional interconnection capacities on infrastructure transiting gas through Ukraine and Belarus. As Gazprom said, it prioritised filling up its domestic storage than the storage units in Europe. Economist reports that “higher prices will lead to Gazprom making over $90bn in gross operating profit this year, up from $20bn in 2019”.
• Remember, Europe faced this winter with almost 20% less gas in its storage. Thanks to this strange behaviour of Gazprom.

3. Lack of Gas pipeline Import alternatives for Europe.

• The former USSR has always been a reliable partner for EU gas supply. Even during the peak of cold war days, gas passed through the pipes uninterrupted.
• However, the same cannot be expected from Russia as there is an entire Wikipedia page that lists the artificial gas disruptions, including the major 2009 disruption causing humanitarian emergency and significant economic distress for many European nations.
• Other major pipeline imports towards Europe come from Norway and Algeria, which comprises nearly 35%. The challenge is that they are already in their close to maximum capacity.
• Of course, the other alternative is to buy LNG from the world market.

4. LNG could be the saviour! But…

• Ursula von der Leyen (European Commission President) recently said that the EU has reached out to its partner countries around the globe to cover the slack in case of total disruption of Russian gas. Saying Europe is safe for this winter if Russia cuts off the gas to Europe is quite a statement, especially considering that Russia sold 43% of the European gas in Q3 2021.
• European Commission President probably mentioned the increased supply of LNG from Qatar and the US to cover the slack from missing Russian gas. As per 2021 values, average regasification terminal utilisation rates in the EU is still below the 50% range, so technically, more import is possible. (Since Europe is relatively close compared to Asian buyers and prices are record high now, Qatar and the US will prefer to sell more LNG to Europe with the possibility of making quick shipments).
• Over the last years, LNG has already covered a 15% to 25% share of the EU gas imports. In January 2022 (in line with the Commission President’s prediction), LNG covered about 40% of total EU gas imports (Moscow would have loved a world without Shale gas!).

5. But there is not enough LNG supply in the world market.

• By 2021, global LNG trade increased 6% to 380 million tonnes as many countries rebounded from the economic impact of the COVID-19 pandemic.
• Shell, an energy major which released its 2022 LNG outlook this February, forecasts the Global LNG market likely to be tight in the near term and the supply-demand gap probably to emerge in the middle of the current decade.
• In the short term, Europe will need to fight with Asian consumers for the market share (Asia might absorb nearly 70% of LNG demand growth through 2040).
• Surely Europe needs to enter long term contracts with LNG sellers worldwide to get rid of the gas factor while dealing with Moscow.

6. Nordstream politics.

• Ukrainian transit delivering Russian gas to the European market has made Moscow lose its sleep for years. Moscow was essentially in a tricky situation when dealing with Ukraine as any major interruption means Gazprom cannot fulfil its delivery to their European buyers.
• Therefore, over the years, Russia has been planning carefully to diversify its dependence on Ukraine by building pipelines, Nordstream(s) to the EU market without touching any hostile neighbours, and also diversifying its customer base by selling gas to China and increasing LNG capacity to serve the world market.
• Moscow has been waiting for this moment — when Moscow no longer needs to depend on Ukrainian pipelines to sell gas. It could have been an even better moment if Nordstream 2 has also been approved. But on 22.02.22, the current German Chancellor halted (not cancelled) the Nordstream 2 project go-live to buy some political pressure after Mr Putin recognized separatists’ claims to the whole of Ukraine’s Donbass region.
• Forget about Nord stream 2, even Nordstream 1 should never have been built in the first place. Germany could have done better. Without German political backing, Nordstream would have never happened (former German chancellor Gerhard Schröder is on the payroll of the Russian government to make this project happen; now imagine Angela Merkal doing the same after her retirement).

Of course, without Nordstream, the gas would have cost high, but who said peace is for free? Handing over the comfort and security of European citizens to the hands of a bunch of old white men who all have one common trauma in their adult life — the fall of the USSR — is not without its own risks. The latest tweet from the former Russian prime minister and a close aide of Mr Putin says all about the gas dependency of Europe on Russia: “Welcome to the brave new world where Europeans are very soon going to pay 2.000 euros for 1,000 cubic meters of natural gas!”

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The Opinions expressed in this post are my own and not necessarily those of my employer.