Facing the worst energy crisis since World War II as the cold-weather heating season starts, Europe continues to dither. European Union (EU) member states are majorly reliant on Russian energy supplies, and a hitback on gas is a critical factor in the crisis caused by Russia’s invasion of Ukraine.
Europe depends on close to 40 percent of its annual gas consumption on Russian supplies, imported via four routes – Ukraine, Belarus-Poland, as well as the Nord Stream 1 and Turk Stream corridors linking Russia to Germany and Turkey via the Baltic and the Black Sea, respectively. Because of the war and financial sanctions imposed on Russia, supplies have been severely curtailed. Overall Russian pipeline supplies were reduced throughout 2021, and producer Gazprom, the Russian energy behemoth, has interrupted its gas supplies to Italy in what looks to be the latest iteration of the dispute between Moscow and Western Europe over natural gas supply since Russia’s invasion of Ukraine in February. Overall, Russia has banned gas exports to several EU countries and has reduced flows through the Nord Stream I pipeline.
Resultantly, inventories in Europe have been at historic lows since last autumn because the Russians had already cut back their supply. Low inventories, a perception of scarcity, and unchanged levels of demand created the conditions for a perfect storm – a fear factor and actual shortage, which drove prices up. During the winters of 2020-2021 and 2021-2022, Europe witnessed a substantial increase in electricity and natural gas prices, as well as a scarcity of gas, which led to greater use of coal and fuel oil. As the winter season approaches, rising prices intensify inflationary pressures, limit post-Covid recovery aims, and aggravate millions of Europeans’ energy poverty. Natural gas and electricity prices in Europe have soared to record highs, forcing the industry to curb output and fueling a cost-of-living crisis.
Recent years have seen a slate of LNG projects canceled as the pandemic weighed on energy demand, and an oversupplied market made greenfield LNG investments uneconomic. The resulting lack of investment, coupled with the post-Covid rebound in global energy demand and the Ukraine war, has sent the price of natural gas soaring – with fuel prices in Europe up almost five times from a year ago. The lack of such investment is putting a heavy burden on both producers and consumers.
Qatar emerges as EU’s potential savior – but fails!
As European utilities seek alternatives to Russian gas, these pressures reportedly led the UK to hold talks with Qatar in November 2021 (months before Russia’s aggression) about a long-term gas arrangement that would make the Gulf state a “supplier of last resort” to the UK. The state of Qatar has emerged as a key pillar of the EU’s strategy. Russia’s weaponization of gas in its confrontation with the West had given Qatar new prominence as a depoliticized source of energy. At that time, Qatar, ostensibly at the request of UK’s Prime Minister Boris Johnson, dispatched four LNG shipments that were previously unallocated to the UK to alleviate a gas supply crunch.
However, Qatar is unable to meet the gas demands of several European countries, including Germany, given the volume of supply that Russia has been providing to the old continent in recent years, which has been compromised by Russia’s invasion of Ukraine and the resulting European sanctions imposed on Vladimir Putin’s regime, and by the recent disruption of the Nord Stream pipelines caused by leaks, which have yet to be investigated to determine their cause and authorship. Rumors and conspiracy theories abound over who would have a motivation to ensure the leak. Jeffery Sachs a prominent American economist at Columbia University caused huge controversy recently when he suggested that the US had much to benefit from the action.
European Energy challenge multiplied by policy paralysis
As a bloc that has often led the shift to cleaner energy, the EU faces the conundrum of building an extensive LNG import infrastructure while making good on net-zero commitments – or steering an energy transition during an energy crisis. The EU’s goal is to save 170 billion cubic meters by 2030 through energy efficiency and renewable energy. Europe’s failure to undertake coherent collective action to sort out its dependency on gas imported from beyond its borders has been worsened by the decline of its domestic production, which covers 42 percent of its requirements down from 53 percent a decade ago.
In 2020, the EU the dependency rate (measured by the share of net imports (imports – exports) in gross inland energy consumption) was equal to 58 percent, which means that more than half of the EU’s energy needs were met by net imports. This rate is lower as compared with 2019 (60 percent), which is partly linked to the COVID-19 economic crisis; however, it is still slightly higher compared with the year 2000 (56 percent). Across the member states, the import dependency rate ranges from over 90 percent in Malta, Cyprus, and Luxembourg to 10 percent in Estonia. In 2020, the EU mainly remained dependent on Russia for imports of crude oil, natural gas, and solid fossil fuels, followed by Norway for crude oil and natural gas.
European policymakers imposed substantial changes in the energy supply to rapidly transition from fossil fuels and nuclear energy to renewable sources. Simultaneously, they overlooked estimates for sustained demand for oil and natural gas, as well as the necessity for a reliable baseload fuel source to supplement intermittent solar and wind. With the notable exception of Russian gas, several EU member states reduced the domestic output of fossil fuels and restricted imports. Germany, which has large natural gas reserves, barred fracking, as did France and other countries. Also, Europe has rejected long-term import contracts, resulting in Europe being gas-starved while being surrounded by some of the world’s largest gas reserves—not just in Russia but also in North Africa, Central Asia, and other countries.
Furthermore, political uncertainty in the UK has exacerbated headwinds for European investors already dealing with the consequences of Russia’s war in Ukraine, as well as global fears about inflation and increasing interest rates. Prime Minister Liz Truss put caps on energy bills, which among other things ended up creating a financial market turmoil in the country. The markets saw it as a fiscally irresponsible act that has ended up with her and her new chancellor being perceived as incompetent and is threatening her government.
Ursula von der Leyen, President of the European Commission, has outlined a set of new European Union energy policies, including price ceilings, higher taxes on energy producers, the development of a new European hydrogen bank, and new support for electric vehicles. Meanwhile, member states of the EU are nationalizing utilities, fixing power pricing, and subsidizing consumers.
Europe’s energy challenge is immense and put into stark relief by the response to Russia’s war in Ukraine. Cutting the ties that bind EU and non-EU nations to Russian gas and oil will be extremely painful this year and in years to come. Governments across Europe have plowed hundreds of billions of Euros into tax cuts, handouts, and subsidies to tackle the continent’s worst energy crisis in decades that is driving up inflation, forcing industries to shut production and hiking energy bills ahead of winter. However, analysts estimate that Europe will need to import around 200 million tonnes of LNG over the next decade to phase out Russian gas. Germany, Europe’s biggest importer of Russian gas, would need around 40 million tonnes of LNG alone to replace the 50 billion cubic meters of pipeline gas it used to get from Moscow.