Russia’s energy dominance ties West’s hands in Ukraine war
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7 min read . Updated: 27 Feb 2022, 07:20 PM IST - Europe gets about 40% of its natural-gas imports from Russia, making it hard to sanction a vital revenue stream for Moscow
Western countries weighing how to sanction Russia over the invasion of Ukraine are up against the reality of its grip over Europe’s energy supply.
Even as sanctions are being imposed, the same countries doing the sanctioning are continuing to import a large proportion of their energy from Russia every day, which is in turn tying their hands in their ability to hit Moscow where it hurts most.
On Thursday, the European Union, U.K. and U.S. laid out sanctions that included measures to cut off Russia’s government and Russian banks from international financial markets but didn’t target oil and gas, which contribute around one-fifth of Russia’s gross domestic product. Last year, Russia sold around $100 billion worth of oil and gas to Europe, according to an estimate by William Jackson, chief emerging markets economist at Capital Economics.
The sanctions introduced by the West so far might reduce Russia’s GDP growth by 1 to 2 percentage points this year, the equivalent of $20 billion to $35 billion, Mr. Jackson said, cautioning that there is a large amount of uncertainty around that estimate.
Russia’s two premier fossil-fuel companies are often described as arms of the Russian state. The government and companies controlled by it own more than 50% of shares in Gazprom PJSC, the giant gas producer and exporter whose critics say it uses gas supplies as a geopolitical tool.
A government-owned company holds more than 40% of shares in Rosneft Oil Co., which describes itself as Russia’s biggest taxpayer. The U.K.’s BP PLC holds another 20% in Rosneft but the British government is now pressuring BP to unload its shares, according to a person familiar with the matter.
Russia is the world’s largest natural-gas exporter and one of the top oil producers. A disruption in Russia’s energy sales would have widespread repercussions for the global economy, from hurting European businesses and consumers to hurting customers at the pump in the U.S.
“The deep energy relationship between Europe and Russia, and Russia’s significant position in the global oil market, is a major constraint on those who might otherwise want to impose even stricter sanctions," said Meghan O’Sullivan, the director of the Geopolitics of Energy Project at Harvard University’s Kennedy School.
In the U.S., imports of Russian crude oil and petroleum products account for about 3% of U.S. oil demand. These have risen to records in recent years, in part because refiners sought alternatives to heavy Venezuelan crude oil subject to U.S. sanctions.
“I will do everything in my power to limit the pain the American people are feeling at the gas pump," President Biden said Thursday. “This is critical to me."
The EU is far more exposed, receiving around 40% of its gas imports from Russia, much of it through pipelines that run through Ukraine, and more than one-quarter of its oil.
So far, the war hasn’t disrupted gas flows. A spokeswoman for the company that runs Ukraine’s pipeline network said it was stable as of 11 a.m. local time Friday. Both Russian President Vladimir Putin and Gazprom have said they would continue to supply European gas customers.
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In fact, after Russia attacked Ukraine on Thursday and prices in the spot gas market rocketed, it became more profitable for European companies to max out the gas they import via Ukraine from Russia under long-term Gazprom contracts. This is because under these contracts buyers typically pay according to the level at which gas was trading a month ago, when prices were lower than they are now in the spot market.
As a result, more gas flowed west from Russia to Central Europe and beyond on Thursday and Friday than in the previous weeks.
Still, the military campaign raises the risk that pipelines that run through Ukraine could be damaged, interrupting the flow of gas. European governments also are concerned that Moscow could shut off the gas in retaliation for Western sanctions, analysts said. Gas prices soared on Thursday by one-third before slipping back Friday. They are about six times as high as a year ago.
If Russian gas is disrupted, the EU would have enough gas in storage and alternative suppliers to get it through the winter in the next month without significant disruptions, said Henning Gloystein, director for energy, climate and resources at risk consulting firm Eurasia. But it would need to spend the spring and summer refilling its inventories ahead of next winter, meaning that already high gas prices would stay elevated and fuel higher inflation, he said.
If Russian gas to Europe stops flowing entirely, “this would do severe damage to Europe’s economy and also undermine global growth," Mr. Gloystein said.
Europe couldn’t replace all the gas it buys from Russia in a pinch. The bulk of any alternative supplies would come in the form of liquefied natural gas. Georg Zachmann, a senior fellow at the Bruegel think tank, said that Europe could double LNG imports at huge expense because it would have to outbid other buyers such as Japan or persuade them to pivot to other fuels.
Coupled with other measures such as eking more gas out of Norwegian gas fields, Mr. Zachmann thinks Europe could replace half the gas it gets from Russia, leaving it with about 15% of current demand unmet.
“This would be super expensive and very complicated," he said.
Additional measures could include rationing gas supplies, starting by slowing production at or closing industrial gas users while giving priority to heating and power generation. To offset rocketing prices, governments could introduce energy subsidies for the poor, though these would weigh on state budgets already stretched by costly pandemic support.
Without Russian gas, Germany and others might be forced to restart mothballed coal and oil power plants, though difficulties securing coal from Russia could make that problematic, said Energy Aspects analyst Trevor Sikorski.
The German economy ministry said that it is looking to phase out coal as soon as 2030 and that it wasn’t considering extending the life of the country’s last three nuclear power plants, which are set to shut down this year under the country’s 2011 nuclear phaseout initiative. A reactivation of nuclear power plants would face enormous political opposition in Berlin, including from the governing Green Party, which has opposition to nuclear energy as one of its founding principles.
In recent weeks, the Italian and Austrian governments have been meeting with leaders from Gulf states to expand energy deliveries.
In Bulgaria, the poorest EU member state, which gets around three-quarters of its gas from Russia, the government has said that it would try to expedite a linkage to Greece’s gas network and might be forced to curtail electricity exports if deliveries cease. The Netherlands is working on plans including the shutdown of major industrial gas users. Pumping more gas from the Groningen gas field, which is being wound down because it causes earthquakes, is a last resort, government officials have said.
In the longer term, European countries have ramped up plans to diversify away from Russia.
Germany, which gets over 50% of its gas via pipeline from Russia, currently has no LNG terminal of its own. This month, however, Economics Minister Robert Habeck said the government would support at least two new terminals, though these will take years to build and face high regulatory hurdles.
On Thursday, Mr. Habeck said that the government will create gas and coal reserves for the coming winter. Germany has no strategic gas reserves, with all gas stowages now in the hands of companies that include Gazprom, which controls some of Europe’s largest gas storage sites.
Germany’s gas reserves have recently dropped to a historic low of about 30%. The EU is drafting rules to force operators to keep reserves at a certain level.
Getting more gas from North African producers like Algeria also is an option being explored in Europe. In theory, fracking is another, though it has faced considerable opposition due to environmental concerns.
Germany banned fracking in 2016 for fear the chemicals in the process could contaminate water supplies, but has some natural reserves it could tap if it were to change its legislation—something that isn’t on the cards for now.
This story has been published from a wire agency feed without modifications to the text
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