Oil & Gas

03 Mar 2022

Europe Can Survive Next Winter Without Russian Gas

03 Mar 2022  by   
Russia’s invasion of Ukraine threw Europe’s dependence on Russian natural gas into sharp relief. The European Union is drafting measures to reduce its reliance on Russian energy, while various European countries, including the biggest economy, Germany, are revising their strategic energy policies, aiming to reduce their energy security vulnerability.

It was this vulnerability that has stopped the EU, the U.S., and allies from slapping sanctions on Russian energy exports (for now). Europe receives some one-third of its natural gas from Russia, but the dependence varies among EU members. Germany is 50-percent reliant on Russian gas, and Italy imports 40 percent of its gas needs from Russia. Southwest European countries Spain and Portugal do not import any Russian gas, but southeast European countries and Russia’s neighbors to the west, Estonia and Finland, are 100 percent or nearly 100 percent dependent on Moscow for their natural gas supply.

As the war in Ukraine threatens to cut off Russian gas supply—either in the form of sanctions or a Putin retaliation to sanctions—Europe realized that ensuring energy security would mean weaning itself off Russian deliveries in the quickest way possible, even at a high economic price.

Ensuring gas for next winter should not be a problem, analysts and the European Commission say. The question is, what will Europe do for the winter after that—and all the following winters in the long term—if it wants to reduce its dependence on Russian gas and not shape its security or sanctions policy in fear of being cut off from its largest source of gas.

This winter is nearly at its end, and European gas in storage is back to the five-year range. With restocking during the summer, Europe could go without Russian gas next winter, according to Wood Mackenzie.

“From record lows at the start of winter, storage levels have now re-enter[ed] their five-year range, albeit on the lower side, and are on track to be in a more comfortable position by the end of March,” Kateryna Filippenko, principal analyst, Europe gas research, at WoodMac, said.

“It is our current assessment that the EU can get through this winter safely. At the moment, gas flows from East to West continue, LNG deliveries to the EU have increased significantly, and the weather forecast is favourable. The use of gas from storage has slowed down and we are still around 30% of storage capacity filled,” European Energy Commissioner Kadri Simson said on Monday.

EU member states need to collectively ensure a certain level of gas storage in their regions and to conclude solidarity agreements to send gas where it’s most needed, Simson said.

“The war against Ukraine is not only a watershed moment for the security architecture in Europe, but for our energy system as well. It has made our vulnerability painfully clear. We cannot let any third country destabilise our energy markets or influence our energy choices,” the commissioner said.

“The European Union can manage without Russian gas next winter, but must be united in taking difficult decisions, accepting that in many cases it won’t have enough time for perfect solutions,” analysts at European think tank Bruegel wrote in an analysis this week.

In the wake of the Russian invasion of Ukraine, Germany announced it was changing course “in order to eliminate our dependence on imports from individual energy suppliers,” German Chancellor Olaf Scholz said on Sunday. Germany will build two LNG import facilities, at Brunsbuettel and Wilhelmshaven, and look to speed up the installation of renewable energy capacity to have 100-percent renewable power generation by 2035.

For Europe, managing without Russian gas “will require improvisation and entrepreneurial spirit,” analysts at Bruegel say.

“The main message is: 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 noted.

“But on the ground, dozens of regulations will have to be revised, usual procedures and operations revisited, a lot of money quickly spent and hard decisions taken. In many cases time will be too short for perfect answers.”

OPEC+ is doing its best to ignore the war started by one of its leading members, but it may not be able to manage it for much longer.

Russia’s invasion of Ukraine, oil’s surge above US$110 a barrel and the resulting mayhem in financial markets barely figured in the cartel’s meeting on Wednesday. The group ratified the 400,000 barrel-a-day production increase that was scheduled for April and wrapped up in a record time of just 13 minutes, delegates said.

Mexican Energy Minister Rocio Nahle tried to raise the subject of Russia, but other members of the 23-nation coalition led by Saudi Arabia swiftly moved on to other matters without any discussion, delegates said, asking not to be named because the meeting was private. Mexico’s energy ministry did not respond to a request for comment.

“The group believes the current prices are driven by geopolitics and not fundamentals,” said UBS Group AG analyst Giovanni Staunovo. “But if Russian exports and production are lower at the next meeting, things might be different.”

Russia’s invasion of Ukraine has triggered one of the strongest packages of economic sanctions every imposed on a major economy, but none of them target energy exports. That’s why OPEC+, which only considers the fundamentals of supply and demand at its meetings and not geopolitics, saw no need to discuss the situation, said a delegate.

But there are growing signs that traders and shipowners are shying away from handling the country’s oil, even without sanctions. A cargo of Russia’s Urals crude was offered for sale at a record discount on Tuesday but found no bidders. About 70 per cent of the country’s exports are currently “frozen” due to the risk of further sanctions or reputational damage, according to London-based consultant Energy Aspects Ltd.

If this situation were to continue until the next meeting of the Organization of Petroleum Exporting Countries and its allies on March 31, it could place Saudi Arabia and its Gulf neighbors in a tough position.

On the one hand, they want to preserve the five-year alliance with Moscow, which is the heart of OPEC+ coalition. The relationship has had its ups and downs -- notably a brief but destructive price war two years ago. But it has kept its unity and is credited for saving the oil markets from the pandemic-induced slump.

But the pressure from the U.S. -- a Saudi ally of even longer standing -- and other consumers to raise production faster could become too strong to ignore. The kingdom’s desired image as a responsible steward of a “balanced” oil market could be under threat if crude remains at US$110 a barrel, or goes even higher.

Russia’s attack on Ukraine is only a week old and the situation is still evolving rapidly. The heaviest fighting may only be beginning as the invading soldiers move closer to Kyiv and other cities.

The list of companies ceasing business with or exiting Russia grows longer every day. U.S. President Joe Biden is already talking about a potential a ban on importing Russian oil and gas, a move that may force prices even higher.

For all their desire to remain as a neutral and cohesive alliance, members of OPEC+ may struggle to maintain that approach. Riyadh could be under incredible pressure to pick a side.

“The current trajectory points to a deepening military crisis, not a diplomatic off ramp” in Ukraine, said RBC Capital Markets Chief Commodities Strategist Helima Croft. Ignoring the conflict may have been possible today “yet such an argument will increasingly strain credulity as Russian export volumes collapse.”


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