Europe is trying to reduce its dependence on Russia in energy, and is bracing for disruptions to vital natural gas supplies as Russia’s war with Ukraine pushes prices to new heights.
The record price of natural gas hit Thursday for the second consecutive day as Russian retaliation and Western sanctions increased the possibility that oil and gas supplies would be restricted. This could cause more problems for people’s wallets. Energy prices have been rising for months due to low supplies. Businesses pass on their costs to customers , driving up the price of everything from utilities bills to groceries .
According to Kaushal Ramesh (Senior Analyst at Rystad Energy), traders were “considering the rising probability that sanctions on gas will be imposed for each day that the offensive continues.”
Gas prices are now 10 times higher than they were at the beginning of 2021. However, it flows through major pipelines that connect Russia and Europe, including through Ukraine, according to pipeline companies.
In order to prepare for possible cutoffs in the event of an intensifying war and reduce Russian dependence, countries are accumulating new supplies by ship of liquefied petroleum gas (LNG) to help them plan. They are also making plans to build gas import terminals, pipelines that aren’t dependent on Russia, and discussing the possibility of allowing coal-fired power stations to continue releasing climate-altering emissions for longer periods of time if they can achieve energy independence.
Many of these measures can take weeks or even years, depending on whether they are for new terminals or pipelines. Long-term solutions include rapidly expanding renewable energy sources like solar and wind. Europe remains reliant on natural gas for heating homes and electricity generation, as well as to supply industries such fertilizer producers.
Europe receives almost 40% of its natural gas from Russia. This is a very different situation to the U.S. which produces its own natural gasoline. However, EU Energy Commissioner Kadri SIMSON says Europe has the tools to deal with any Russian retaliation this Winter while acknowledging that a total cutoff would be difficult.
Germany spends 1.5 billion euros ($1.66 million) to purchase more LNG. Chancellor Olaf Scholz proposed Sunday the construction of two LNG import terminals. This was just days after blocking the Nord Stream 2 gas pipe from Russia into Europe.
European Union members are working to establish a strategic gas reserve as well as storage requirements. Officials urge countries to sign agreements for sharing gas in emergency situations.
Next week, the EU’s executive committee will announce steps that governments can follow. According to the Paris-based International Energy Agency, Russian gas imports could be reduced by one-third next year. This includes allowing existing gas contracts with Russia to expire, finding new supplies from Norway and Azerbaijan and imposing minimal storage requirements. Cash support will also be offered for electricity customers who are vulnerable.
After permission was suspended last January, Denmark has granted the go-ahead to construct a pipeline that will bring Norwegian gas to Poland.
Soren Juul Larsen is chief project manager at Energinet. “We are really busy catching-up with the lost months,” he said. “We have reached an agreement with our contractors to deploy more machines and personnel for this task so we can keep the pace up and finish as quickly as possible,” Soren Juul Larsen, chief project manager at Energinet.
Energinet expects the Baltic Pipe to be partially launched Oct. 1, and fully operational January 1. It will have a capacity of 10 billion cubic metres of gas per year.
According to the Bruegel research center in Brussels, it is possible, but difficult, to get Europe off Russian gas completely by next winter’s heating season. Due to record LNG shipments from the U.S., Europe would be left with a deficit of 10% to 15% and would need to take steps to reduce its gas consumption. This would impact businesses first.
They stated that if the EU is willing or able to pay the price, it should be possible for Russian gas to be replaced by next winter’s without the need to disrupt electricity supply or economic activity.
Wide-ranging Western sanctions so far have not affected gas or oil, but they have targeted Russian banks and their ability interact with Western financial system. Energy transactions were exempted from the sanctions. Officials claim they are trying to protect their economies and consumers while inflicting pain in Russia.
However, sanctions indirectly hit oil from Russia. Russia is the No. The No. 3 oil producer in Europe, which sells 25% of Europe’s supply. In recent days, some oil buyers have avoided Russian crude oil, afraid that sanctions could make their oil unusable.
“Cargoes have been rejected by European refiners on the market because people are afraid of sanctions coming and so they don’t want to get caught with cargo they can’t resell,” stated Amy Myers Jaffe research professor and managing director at the Climate Policy Lab at Tufts University.
A Russian energy cutoff was considered unlikely, especially with gas, because it would have a devastating effect on Russia’s largest customers in Europe. It would also result in a loss of revenue of $300 million per day.
Russian officials stressed that they do not intend to cut off oil and gas supplies and that they are reliable suppliers. The problem is that even though Western countries have cut off Russian banks, Europe continues to support Russia through energy purchases.
Jen Psaki, White House Press Secretary, stated that the U.S. is open to sanctioning Russia’s oil and gas industries but was weighing it against possible costs to Americans.
“We are considering it. She said Wednesday that it was still on the table. However, we must weigh the impact. We’re not trying hurt ourselves. We are trying to harm President Putin and the Russian Economy.”
While Europe may be vulnerable short-term before it can develop renewable energy, Russia would suffer the most long-term from an embargo.
According to Hendrik Mahlkow, a trade expert at the Kiel Institute for the World Economy, a gas embargo over many years would lead to a decline of 2.9% in Russian economic output while Germany would see a gain of 0.1%. Mahlkow stated that any Russian threat to stop supplies “wouldn’t be very credible.”
