Europe scrambles to reduce dependence on Russian gas

Europe is scrambling to reduce its dependence on Russia for energy and bracing for potential disruption to critical natural gas supplies as Russia’s war in Ukraine sends prices to new highs.

Natural gas prices hit a record on Thursday for a second day in a row as restrictions on oil and gas were increasingly treated as a possibility on the eighth day of the war — whether through Western sanctions or Russian retaliation.

That could mean even more pain to people’s wallets – energy prices have been high for months because of low supplies, driving up the cost of everything from utility bills to shopping as businesses pass along their costs to customers.

Traders were “factoring in the rising probability of sanctions on gas for each day the offensive continues,” said Kaushal Ramesh, senior analyst at Rystad Energy.

The price of gas is 10 times what it was at the start of 2021. But it continues to flow through the major pipelines from Russia to Europe, including those through Ukraine, pipeline companies say.

To prepare for any cut-offs as the war intensifies and to reduce Russian reliance, countries are rounding up new supplies of liquefied natural gas — LNG — by ship. They’re also speeding up plans for gas import terminals and pipelines that do not depend on Russia and talking about allowing coal-fired power plants to keep spewing climate-changing emissions for longer if it means energy independence.

Yet many of the measures will take months or, in the case of new pipelines and terminals, years. The long-term answer is rapidly building out renewable sources such as wind and solar. But for now, Europe is reliant on gas to heat homes, generate electricity and supply industries like fertiliser producers.

Europe, which gets almost 40% of its gas from Russia, is in a different situation than the US, which produces its own natural gas. Still, EU energy commissioner Kadri Simson says Europe “has the tools” to handle any Russian retaliation this winter while conceding a total cut-off “would, of course, still be a challenge.”

Germany is spending 1.5 billion euros (£1.24 billion) to buy more LNG. Chancellor Olaf Scholz on Sunday proposed building two LNG import terminals, days after blocking the already-completed Nord Stream Two gas pipeline from Russia to Europe.

European Union countries are working on setting up a strategic gas reserve and establishing storage requirements. Officials are urging countries to sign agreements to share gas in emergencies.

The EU’s executive commission is set to unveil steps next week that governments can take. The Paris-based International Energy Agency said on Thursday that Russian gas imports could be cut by one-third this year through steps including letting existing gas contracts with Russia expire, finding new supplies from partners such as Norway and Azerbaijan, imposing minimum storage requirements, maximising use of remaining nuclear plants and offering cash support for vulnerable electricity customers.

Denmark has given the go-ahead for construction of a pipeline to bring Norwegian gas — another major source for Europe — to Poland after permission was suspended last year.

“We are really busy catching up with the lost months,” Søren Juul Larsen, chief project manager at Energinet, said. “We have agreed with our contractors that they will deploy more machines and people for the task so that we can set the pace and be finished as soon as possible.”

Energinet plans for the Baltic Pipe to partially launch on October 1 and be fully operational by January 1 with capacity of up to 10 billion cubic meters of gas a year.

Weaning Europe completely off Russian gas by next winter’s heating season — if that becomes necessary — would be possible but painful, involving extra costs and possibly forced conservation, according to analysts at the Bruegel research institute in Brussels. Given record LNG shipments are already coming from places like the US, a total loss of Russian gas would leave Europe 10% to 15% short and facing potentially painful steps to reduce gas use, which would hit businesses first.

“If the EU is forced or willing to bear the cost, it should be possible to replace Russian gas already for next winter without economic activity being devastated, people freezing or electricity supply being disrupted,” they said.

So far, wide-ranging Western sanctions have spared gas and oil even as they targeted Russian banks and their ability to interact with Western financial systems. Specific exemptions were included for energy transactions. Officials say they’re trying to avoid hurting their own economies and consumers as they inflict pain on Russia.

But sanctions are indirectly hitting oil from Russia, the world’s number three oil producer that sells 25% of Europe’s supply. Some oil buyers in recent days have shunned Russian crude, fearing that if sanctions were applied to Russian energy, their purchased oil could be rendered unusable.

“Cargoes have already been rejected by European refiners in the market because people are afraid sanctions might be coming, and so they don’t want to be caught with some cargo they can’t resell,” said Amy Myers Jaffe, research professor and managing director of the Climate Policy Lab at Tufts University.

An energy cut-off imposed by Russia was long regarded as unlikely — particularly with gas — because it would cost Russia its biggest customers in Europe and some £224 million in revenue a day.

Russian officials have underlined that they have no intention of cutting off oil and gas and have stressed their role as reliable suppliers. Yet the conundrum remains: as Western countries cut Russian banks off, Europe continues to support Russia’s government — and military — through energy purchases.

The US is “very open” to sanctioning Russia’s energy and gas industry but is measuring that against potential costs to Americans, White House press secretary Jen Psaki said.

“We’re considering it. It’s very much on the table, but we need to weigh what all of the impacts will be,” she said on Wednesday on MSNBC. “We’re not trying to hurt ourselves. We’re trying to hurt President Putin and the Russian economy.”

While Europe is vulnerable in the short term before it can build out renewables, it’s Russia that would lose long term from an embargo or cut-off.

A gas embargo would over several years lead to a slump of 2.9% in Russian economic output and a 0.1% gain for Germany, said trade expert Hendrik Mahlkow of the Kiel Institute for the World Economy. Any Russian threat to halt supplies “would not be very credible”, Mr Mahlkow said.