Germany has warned that Russia’s cuts to European gas supplies could trigger a collapse in energy markets as much as the Lehman Brothers financial crisis.
1. What changes did the conflict bring about?
The European Union plans to cut gas imports from Russia by two-thirds by the end of 2022, after Russian President Vladimir Putin ordered all “unfriendly” countries to use the ruble as a settlement currency for gas transactions from April in response to Western sanctions. According to Russian regulations, European countries must open special accounts in foreign currencies and rubles in Gazprom to process gas purchases. Poland, Bulgaria, Denmark, Finland, and the Netherlands have all been “suffocated” by Russia for refusing to comply with the new regulations. Later, Russia also drastically scaled back pipeline gas supplies to the European continent, and even countries trying to comply with the new payment rules saw gas supply cuts. The end result was that customers in Germany, Italy, France, and Austria did not receive all the gas they requested.
2. How did Russia become so important?
With its vast Siberian gas fields, Russia has the world’s largest natural gas reserves. It began exporting natural gas to Poland in the 1940s and laid pipelines in the 1960s to transport natural gas to or through the former Soviet republics. But since the collapse of the Soviet Union, Russia and Ukraine have repeatedly sparred over gas pipelines passing through Ukrainian territory, prompting Russian authorities to look for alternative routes.
3. How vulnerable is Europe?
The supply crunch in late 2021 gave us an insight into just how reliant Europe is on Russian gas exports, with benchmark prices more than tripling. The European Union’s gas stocks fell to an all-time low as North Sea fields took longer than expected to maintain and some liquefied natural gas (LNG) was shipped to Asia where demand has soared. In 2022, due to the unsecured supply of Russia, LNG imports in Europe have increased rapidly, domestic suppliers have pledged to maintain high production capacity as much as possible, and EU buyers have sought new sources of supply from Africa, Central Asia and other places. However, Russia’s size in the natural gas market is so huge that it is difficult for Europe to find a complete substitute in the short term. As of mid-June, the flow of natural gas from Moscow to Europe via the Nord Stream pipeline had plummeted by around 60 percent, forcing utilities to tap gas reserves that are typically used during peak winter months.
4. How vulnerable is Germany?
The EU depends on Russia for more than half of its natural gas and one-third of its oil. Russia’s standoff with the West has led Germany to vigorously develop renewable energy and invest in LNG import facilities, but it will be many years before these are actually operational. At the same time, Germany is restarting polluting coal-fired power plants and subsidizing other energy suppliers to offset a sharp drop in Russian gas imports.
5. How have other countries been affected?
Central and Eastern European countries are more vulnerable to disruptions to Russian gas supplies, as these economies have fewer alternatives than Western and Southern European countries. Russia’s gas supply will account for 40% of Italy’s demand in 2021, but Italy has struggled to find alternative sources around the world and has already struck new deals with some suppliers, particularly in North Africa. Some smaller gas buyers, such as Finland, plan to use floating LNG terminals. Poland, where most of its electricity comes from thermal power plants, has invested in a new pipeline from Norway that is expected to open in October.
6. What role does Ukraine play?
About a third of Russian gas transits through Ukraine to Europe. The supply of natural gas passing through the country has been reduced since May 11 because of the fierce fighting between Russia and Ukraine in the eastern part of Ukraine, a gas crossing point in Ukraine was closed. When Ukraine and Russia reached a five-year gas transit deal in December 2019, Ukrainian President Volodymyr Zelensky said the country would receive at least $7 billion in transit fees from it.
7. How has Russia caused supply disruptions to the market before?
In 2006 and 2009, disputes with Ukraine over gas prices and siphoning led Russia to cut off gas supplies to Europe. The second “breathing” lasted for nearly two weeks in the cold winter. Slovakia and some Balkan countries have had to ration gas, shut factories and cut power supplies. Since then, the most vulnerable countries have raced to lay pipelines, connect power grids and build terminals for imported LNG. LNG can be imported as far as Qatar and the United States.
8. What supply networks are there?
External supplies come mainly from Russia, Norway and Algeria, which account for about 80% of EU gas consumption. Some of the biggest economies are most at risk, with Germany importing as much as 90 percent of natural gas, much of which is transported through the Nord Stream 1 pipeline buried under the Baltic Sea. The pipeline has been in full operation since 2012. (Pipeline 2, which was completed late last year but was not commissioned due to political factors, is still shut down.) Belgium, Spain and Portugal face the problem of low storage capacity, as does the UK, which is no longer part of the EU and It has closed its only large-scale natural gas storage station. Continental Europe has a large number of natural gas pipelines, but many cross multiple borders, leading to a large number of possible choke points.