By Todd Prince
(RFE/RL) – With no end in sight to Moscow’s devastating war against Ukraine, a related struggle is now underway that is bloodless but potentially painful for both sides. Russia, the world’s largest exporter of natural gas, faces the European Union, the world’s third-largest economy — and things could get worse before it’s over.
The EU has made clear it plans to end its historic reliance on Russian energy — an attempt to halt funding for an unprovoked attack that has killed thousands and produced mounting evidence of war crimes, and to give President Vladimir a powerful lever of influence to take Putin’s hands.
The bloc has already announced a ban on Russian coal, taking effect in August, and this week could announce a ban on Russian oil from January 2023.
It’s not that easy with natural gas.
While some EU officials have called for a ban on Russian gas, the issue is much more contentious because the 27-nation bloc cannot replace it in the short term – unlike oil and coal – without hurting its economy, experts say.
Putin, unwilling to allow Russia’s largest gas customer to end its dependence on its own schedule and leave his country with a shattered economy, appears to be trying to exploit this vulnerability.
“Europe will pay”
Last week Russia announced it would halt gas supplies to EU member states Poland and Bulgaria in what European officials and analysts say is an attempt by Putin to split the EU and send a warning to the rest of the bloc.
“Putin wants to try to convince Europe of the consequences – to show that Europe will pay for its support of Ukraine,” said Will Pomeranz, acting director of the Kennan Institute at the Wilson Center in Washington.
“When the economy suffers and people suffer, [it’s possible] that European nations – Germany or France or some other nations – would say, ‘It’s not worth it,’” he said.
Some in Europe are already saying so.
Days before Russia invaded Ukraine on February 24, Germany shut down Nord Stream 2, a $10.5 billion pipeline built to bring Russian gas under the Baltic Sea to Germany. But in April, German finance minister Christian Lindner defied calls for a “temporary” EU embargo on Russian gas imports, saying it would “do us more harm than them.”
Germany is Russia’s largest natural gas customer in the EU, accounting for nearly a third of imports – which totaled 155 billion cubic meters (bcm) last year, of which 140 bcm through pipelines. That was equivalent to around 40 percent of the EU’s gas consumption in 2021, making Russia the largest supplier to the bloc.
For decades, Russia has been an important source of gas used to heat homes, schools and hospitals, generate electricity and power industrial plants in Europe. With increasingly strained relations between Russia and the EU and critics accusing Putin of using energy as a weapon, mutual trust has become increasingly difficult in recent years.
With its rampant aggression and evidence of atrocities some believed unthinkable in 21st-century Europe, Russia’s unprovoked war on Ukraine has given the EU a powerful incentive to break off what appears to be an increasingly risky relationship as soon as reasonably possible .
“A Bit Challenging”
The European Commission said in March that the bloc could cut Russian gas imports by as much as two-thirds this year – or about 100 billion cubic meters – and halt supplies entirely “well before 2030”.
Is that possible?
The commission’s calculation includes the acquisition of an additional 50 billion cubic meters of super-cooled liquefied natural gas (LNG) and 10 billion cubic meters of line gas from non-Russian sources, as well as reducing demand by 20 billion cubic meters through new solar and wind projects that are being developed in this year go online and by 14 billion cubic meters through increases in efficiency.
Carlos Diaz, an analyst at Oslo-based research firm Rystad Energy, called the 2022 target “a bit challenging” due to a possible decline in electricity generation from existing nuclear and hydroelectric plants.
“Maybe they can come close, but there are limited opportunities to replace gas in the energy sector,” he told RFE/RL.
Diaz said the EU has the capacity to import even more LNG than the 50 billion cubic meters the European Commission is targeting for the year, but the problem is finding it at an affordable price.
LNG supply will only grow by about 25 billion cubic meters this year, meaning Europe will have to source volumes from Asia – the largest LNG market – to meet its needs, he said.
European LNG prices have risen to record highs over the past year and are now surpassing Asian prices, making the EU a more attractive destination for exporters, particularly those in the United States.
The LNG market will remain tight through mid-decade, when the United States and Qatar are expected to significantly increase supply, Diaz said, meaning Europe could struggle to further increase LNG imports in 2023 .
Although Europe has invested heavily in alternative energy over the past decade to reduce demand for fossil fuels, its domestic gas production has fallen sharply.
EU members, including Germany, had turned to Russia to fill the gap.
Now European nations are rethinking their production plans amid the crisis.
Norway, which is not an EU member, plans to increase gas production this year to meet the bloc’s growing demand for non-Russian energy. As the second largest EU supplier after Russia, the Scandinavian country is planning a deal new 10 bcm pipeline to Poland over Denmark later this year.
The Netherlands announced in January that it would nearly double production at Groningen, once Europe’s largest natural gas field, to about 7.6 billion cubic meters this year from an earlier estimate of 3.9 billion cubic meters.
Production at the field has fallen sharply in recent years due to tremors that have damaged property, and the government had planned to close it in 2023. But after the invasion of Russia in Ukraine, local residents are for it to increase production in the field to 12 billion cubic meters, a level that is considered safe.
Thierry Bros, an energy expert and professor at Sciences Po Paris research university, told RFE/RL that the Dutch government could “reconsider its own policies” and increase production even more than planned if European natural gas prices spike.
Romania, the second largest natural gas producer in the EU after the Netherlands, has the potential to increase production from Black Sea fields by 10 billion cubic meters a year, but disputes over offshore taxation have repeatedly delayed projects.
Because of the crisis, Romania can now “try to accelerate these developments,” said Diaz.
Beyond Europe, the EU could get more gas from North African countries this year, including Algeria, its third largest supplier after Russia and Norway. Italy signed a deal with Algeria earlier this month to increase imports from autumn. The agreement calls for up to a further 9 billion m³ for 2023-24.
Azerbaijan could increase its gas exports to the EU and the Caspian Sea state by 2 billion cubic meters this year could continue to rise Exports later in the decade as pipeline capacity expands.
The Trans-Adriatic Pipeline, which transports Azerbaijani gas to Europe, said it could potentially double capacity to 20 bcm gradually over several years.
Meanwhile in Moscow
Russia is taking its own measures in the growing dispute over energy supply.
After the EU imposed new sanctions on Russia’s economy after invading Ukraine, Putin urged “unfriendly” European countries to pay for Russian natural gas in rubles — or more specifically, to deposit hard currency into an account at Gazprombank and pay the sum then convert to rubles.
The ruble system is a potential violation of sanctions and some EU countries, including Poland and Bulgaria, have refused to bow to the demand. The two countries together consume about 12 billion cubic meters of Russian natural gas and had planned to let their contracts expire at the end of the year.
Poland will receive gas directly from Norway once the new pipeline via Denmark is completed, while Bulgaria will receive Azerbaijani gas this year when an interconnector from Greece is completed.
Russia will be very tight economically if the EU meets its targets for 2022 and beyond.
Russia supplied the EU with 140 billion cubic meters of natural gas via pipelines from fields in western Siberia and has no alternative export route. Moscow described plans to build a pipeline to connect the West Siberian fields with an export pipeline to China, but industry analysts say that’s years away at best.
A complete disruption of Russian gas supplies to Europe, initiated by both sides, would cost Russia tens of billions of dollars a year in lost revenue.
The price to be paid?
Whatever happens, the gas supply showdown could have significant legal ramifications. Russia maintains long-term contacts with more than 20 European nations that extend over different time periods – in Austria’s case up to the year 2040.
Having to invest billions of dollars up front to develop the fields and pipelines to transport the gas to Europe, Russia has demanded sales guarantees. These so-called “take-or-pay” contracts oblige European companies to pay a minimum amount of gas each year, even if they do not purchase it.
The EU must analyze whether it is breaking any treaties if it tries to end Russian gas imports, as it could have “very big legal ramifications,” Diaz said.
Likewise, European countries could sue Russia if they were cut off from the Kremlin, Bros.
“It’s going to be a heavy price to pay on either side,” he said, adding that claims could reach hundreds of billions of dollars.
Referring to efforts to reduce dependency, Bros said the EU should announce a ban on Russian gas, to come into effect by the end of the year, to spur efficiency improvements, increase investment in alternatives and infrastructure such as LNG regasification build up plants.
While this could hurt European industry, Bros believes it is the price to pay to stop Russia’s invasion of Ukraine.
“Even though it will be difficult, that’s what war is about. You don’t wage war by just walking and shopping,” he said. “We need to take action ourselves, like energy efficiency, demand reduction and some demand annihilation.”
- Todd Prince is Senior Correspondent for RFE/RL based in Washington, DC. He lived in Russia from 1999 to 2016 and worked as a reporter for Bloomberg News and as an investment advisor for Merrill Lynch. He has traveled extensively in Russia, Ukraine and Central Asia.