As the crisis between Russia and the West deepens on the borders of Ukraine, Europe and Russia’s long interdependence on one another for energy has become a critical bargaining piece on both sides.
Gas and oil-rich Russia is linked to European energy markets through a series of critical pipelines, the biggest flowing through Ukraine, which have become chokepoints for both sides in the negotiations to avert the growing crisis.
Last year, gas delivered to Europe through Ukrainian pipelines fell by 25 per cent and fears of further disruptions have ramped up with the buildup of Russian troops near the Ukrainian border.
The chart shows the volumes of Russian gas flows that, according to S&P Global Platts analytics, are likely to be at risk between January 2022 and March 2023. It starts at 101 mcm/d and by the end, 27 mcm/d is at risk if Ukraine transit halts, 60 mcm/d at risk if Nord Stream 2 is cancelled. 123 mcm/d volume remains unaffected.
Moscow denies Western claims it has plans to invade Ukraine. But if the crisis does flare, there are few alternatives to fill the gap if Russian gas supplies to Europe were disrupted.
At the end of January, S&P Global Platts Analytics estimated that a complete suspension of Russian gas flows into Europe was a “highly unlikely scenario”, but even small disruptions against the backdrop of a post-pandemic global gas reserve shortage and steeply rising prices could cause deep pain for European energy markets and downstream consumers.
Disruptions to any of the four main gas routes — Nord Stream, Yamal, Ukraine and Turkstream — and delay of certification to Nord Stream 2, could send Europe into an energy crisis.
Already this winter, energy prices in Europe have sky-rocketed due to low gas storage levels, high European Union carbon prices, fewer liquefied natural gas tanker deliveries and lower than normal Russian gas supplies and infrastructure outages.
Further disruptions to energy imports would mean trouble for the continent, which has grown increasingly reliant on outside sources for energy amid a domestic focus on developing green energy alternatives. In 2019, the last year complete data was available, a full 60 per cent of the European Union’s energy needs were met through foreign imports.
A chart shows that in 2000 the EU was 56 per cent dependent on energy imports and then was 60 per cent dependent in 2019.
Of the two main energy sources — gas and oil — the EU is most reliant on Russia as a source of natural gas, which makes up a steadily increasing share of the block’s energy mix as the continent draws down on coal.
With its abundant gas reserves, the proximity of its oilfields and an extensive existing pipeline network, Russia dominates the EU’s gas market at about 38 per cent of total supply. Norway, the bloc’s next largest source of natural gas, accounts for half that, just 19 per cent of the market.
The interdependence between Europe and Russia is likely only to deepen with the new Nord Stream 2 pipeline set to double the direct supply of natural gas from Russia to Germany under the Baltic Sea. That is, of course, unless the crisis in Ukraine threatens Nord Stream 2’s regulatory approval process, a potent threat that could scrap the whole project, which the United States and Europe have wielded during negotiations.
During the gas crises of 2006 and 2009, disputes between Russia and Ukraine, mostly over pricing, saw gas supplies cut to Ukraine with the effects immediately rippling through Europe.
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Over the last 20 years, though, Russia has built pipelines to circumnavigate Ukraine and protect its oil and gas supply routes from regional issues there.
Today, shutting off Ukraine entirely would only directly affect a few countries, according to The Center for Strategic and International Studies (CSIS). Just Slovakia, Austria and Italy would feel the direct impact, as would Ukraine, which no longer buys gas directly from Russia but through a gas buy-back system.
But if shutting off the gas entirely isn’t as likely, European politicians and energy markets experts have accused Russia of deliberately holding back on supply across some pipeline networks to put pressure on Germany and the European Union to finalise the Nord Stream 2 project.
According to data from Bruegel, a European think tank, gas imports from Ukrainian pipelines have dipped below 5-year ranges.
Three charts show the current flows of natural gas pipelines, Nord Stream 1, Ukraine Transit and Yamal with weekly 5-year minimum and maximum volumes. Nord Stream 1 is shown to be operating near the maximum weekly capacity, while Ukraine is operating at or below its minimum weekly capacity. The Yamal pipeline is shown to be well below even its minimum weekly capacity.
The critical Yamal pipeline has dropped to a fraction of its normal flow from Russia. Since Dec. 21, the pipeline has been flowing in reverse, from west to east, sending German gas reserves to Poland. Russia oil giant Gazprom had declined to order any transit capacity across the route for February, while it has kept Nord Stream 1 flowing at near maximum capacity rates.
Russia denies it is disrupting gas flows to Europe and says it is meeting all its contractual obligations on gas exports. But European Union politicians still blame Gazprom for stoking the gas price problem, saying it has not responded to surging demand by offering extra volumes to spot market buyers like other suppliers have.
The decreased flow through the Yamal pipeline has put significant upward pressure on European gas prices.
That volatility in Europe spread across global markets after the US warned last week that a Russian invasion of Ukraine could come “any day”.
A chart shows that the benchmark gas price in Europe, measured in the price per one million British Thermal Units since January 2020, peaked at $60 on Dec. 21, 2021 and far outpaced prices in the United States which peaked at $6.3 on Oct. 5, 2021.
With Europe and Russia’s energy markets locked tightly together, Europe’s main threat to offset Russia’s moves in Ukraine is a mixture of sanctions and delaying or stopping altogether the certification process for Nord Stream 2. Europe is Russia’s principal export market for gas, with Germany, Italy and France taking in nearly 36 per cent of all Russian gas exports in 2020. That gives the continent significant leverage from the demand side. The German government has also, under intense pressure from the United States and other Western allies, indicated it would consider imposing sanctions on Nord Stream 2 if Russia invades Ukraine.
Still, analysts warn European sanctions would cut both ways and could seriously squeeze Europe where gas storage levels are already very low for winter.
"It would be difficult for Europe to stomach sanctions which effectively cut off Russian gas supply, or at least a large portion of these flows," said analysts at ING.
Both Europe and Russia have made moves to diversify their energy markets, which would help both better weather conflicts between them.
Russia has agreed a 30-year contract to supply gas to China via a new pipeline and will settle the new gas sales in euros, bolstering an energy alliance with Beijing amid Moscow's strained ties with the West over Ukraine and other issues.
Gas may come from the fields off Russia’s Sakhalin, including the Yuzhno-Kirinskoye, which Washington put under sanctions in 2015 for Moscow's role in the crisis in Ukraine.
Source: Gazprom; Global Energy Monitor; Reuters
But the new deal won’t divert gas from Russia’s western European pipeline network into China, and according to the Atlantic Council, the sales from this deal will be a fraction of those from the European market.
In the short term, Europe has been able to pick up some of the shortage of Russian gas with a boost of liquefied natural gas (LNG) imports.
But there is little spare capacity in the LNG supply chain, and increased supplies to Europe will result in reduced supplies in other regions.
Norway, Europe's second largest supplier, is delivering natural gas at maximum capacity and cannot replace any missing supplies from Russia, its prime minister said.
The head of NATO has already advised Europe to diversify its energy supplies, but if Russia sees through a military intervention in Ukraine, Europe may be forced to cut demand.
