Russian gas has been attractive to Europe for decades because it’s easy to transport and almost always available. Some European Union countries depend on it because they are shutting coal plants, and Germany has even been planning for the end of nuclear power. Russia’s dominance has been enhanced by the depletion of North Sea fields controlled by the U.K. and the Netherlands. Gazprom PJSC supplies about a third of all gas consumed in Europe and, before the start of the Russian war in Ukraine, was on track to become even more important as the continent shrinks its own production.
1. What’s sparking the rethink?
After Russia invaded Ukraine, the European Union drew up a plan to cut gas imports from Russia by two-thirds by the end of 2022. Russia, after suffering punishing sanctions, hit back, with President Vladimir Putin signing a decree demanding that all buyers from “unfriendly” countries should pay in rubles starting from April. They would have to open special accounts with Russia’s Gazprombank JSC, in foreign currency and rubles, to handle their payments or face a cut-off in supplies. Poland and Bulgaria, whose contracts with Russia were due to expire in 2022, were the first to see their gas flow halted on April 27 for failing to abide by Putin’s new terms. Hungary said it had no choice but to agree to Moscow’s demands, adding that some other countries in the bloc were doing the same. Austria was confident it could keep the gas flowing, and Germany appeared to be pursuing a compromise.
2. How did Russia become so significant?
With its vast Siberian fields, Russia has the world’s largest reserves of natural gas. It began exporting to Poland in the 1940s and laid pipelines in the 1960s to deliver fuel to and through satellite states of what was then the Soviet Union. Even at the height of the Cold War, deliveries were steady. But since the Soviet Union broke up, Moscow and Kyiv have quarreled over pipelines through Ukrainian territory, prompting Russian authorities to find other routes.
3. How vulnerable is Europe?
A supply crunch in 2021 provided a vivid insight into Europe’s reliance on gas flows from Russia with benchmark gas prices more than tripling. Gas stockpiles in the EU fell to a record low, with heavy maintenance taking place in the North Sea after Covid-induced delays, while supplies of liquefied natural gas were redirected to Asia to meet soaring demand there. In 2022, Europe’s LNG terminals were running at full throttle as a record amount of discounted supplies arrive, while domestic producers led by Norway were promising to keep production as high as possible. EU officials and buyers were tapping new supplies from Africa to Central Asia, while also planning to boost energy efficiency and using more renewables. But Russian volumes were still too large to fully replace in the short term.
4. How vulnerable is Germany?
Germany, the EU’s powerhouse, has been scaling back its use of coal and nuclear power and relies on Russian gas for about 40% of its needs. The country, which lacks LNG facilities, is now rushing to build those and secure supplies of the super-chilled fuel, and aims to wean itself off Russian gas by mid-2024. It also sends some gas to Poland, which according to Gazprom is of Russian origin, meaning that a potential standoff between Moscow and Berlin would hurt several countries at once.
5. Which other countries are exposed?
Russian supplies accounted for about 40% of Italy’s demand in 2021, but that country has been scouring the globe for replacements and has secured new agreements with suppliers particularly in North Africa. Some smaller gas buyers like Finland, also highly dependent on Russian gas, are planning to use floating LNG terminals. Poland, which generates most of its electricity from coal, invested in a new gas pipeline from Norway, set to start flows in October, while Bulgaria plans to increase Azeri gas imports in 2022 with the opening of a spur from Greece, a country that can also supply LNG. France relies on Russia for only about 17% of its gas use and its large nuclear-power industry means it’s less exposed than some other European countries.
6. What role does Ukraine play?
About a third of Russian gas flowing to Europe passes through Ukraine. Even as the crisis in the region escalated into war, analysts said Russia, with a history of supply disruptions over price disputes, probably wanted to be seen as a reliable supplier. Gazprom’s shipments to Europe and Turkey were about 177 billion cubic meters in 2021, according to calculations by Bloomberg News and BCS Global Markets based on the company’s data. When Ukraine and Russia reached a five-year gas transit deal in December 2019, assuring supplies until 2024, Ukrainian President Volodymyr Zelenskiy said the nation would earn at least $7 billion from transit fees.
7. How has Russia disrupted the market before?
In 2006 and 2009, disputes with Ukraine over pricing and siphoning of gas led to cutoffs of Russian supplies transiting through the country. The second shutdown lasted almost two weeks in the dead of winter. Slovakia and some Balkan countries had to ration gas, shut factories and cut power supplies. Since then, the most vulnerable countries have raced to lay pipelines, connect grids and build terminals to import LNG shipped from as far as Qatar and the U.S.
8. What supply networks are there?
Outside supplies, mostly from Russia, Norway and Algeria, account for about 80% of the gas the EU consumes. Germany imports much of its gas via a pipeline under the Baltic Sea called Nord Stream, which has been fully operational since 2012. (This was the supply line Russia on March 7 suggested could be cut as part of its response to sanctions imposed over the invasion of Ukraine.) Belgium, Spain and Portugal face the problem of low storage capacity, as does the U.K., which is no longer part of the bloc and closed its only big gas storage site. The continent has a mass of pipelines, including Yamal-Europe, which runs from Russia through Belarus and Poland before reaching Germany, and TAG, which takes Russian gas to Austria and Italy. Many cross several borders, creating plenty of possible choke points.
9. What about the Nord Stream 2 pipeline?
It was against this background that Nord Stream 2, a new Russian pipeline alongside the first, was completed in late 2021. But it became entangled in politics and a lengthy regulatory process, even before the war in Ukraine put it firmly on ice. There had been strong opposition from the U.S., which imposed sanctions that delayed construction. Following Moscow’s invasion of Ukraine, Germany suspended its certification process, and the EU’s executive arm readied a revised energy strategy for the bloc to “substantially reduce our dependency on Russian gas this year.”
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