The Russian invasion of Ukraine has delivered a shock to oil and gas markets in Europe. Europe is heavily dependent on Russia for its oil and gas for more than 65% of its usage as it is economical and convenient. The supply is mostly being carried by the vital undersea pipeline Nord Stream 1, connecting Russian gas to Europe through Germany. However, in retaliation to international sanctions, Russia has cut off the supplies of cheap natural gas that the European continent depended on for years to run factories, generate electricity and heat homes. It has made European governments scramble for new provisions and ways to blunt the impact as economic growth slows and household utility bills rise.
Russia has the world’s largest reserves of natural gas and remained the leading supplier of gas, oil, and coal to Europe. Europe imported about 40% of its gas from Russia before the Russian invasion of Ukraine. European Union’s (EU) largest economy, Germany, is Russia’s leading customer, paying Russia’s state-owned gas company €200 M. Nearly 25% of the EU’s energy consumption comes from natural gas, oil and petroleum (32%), and biofuels and renewable energy (18%). Solid fossil fuels (11%) make up the rest. That dependency on natural gas means reliance on Russia. Currently, the EU is the largest importer of natural gas in the world, with the major part of its gas coming from Russia (41%), Norway (24%), and Algeria (11%).
Russian gas was easy to transport, almost always accessible and therefore has been attractive to Europe. Its significance grew in recent years as several countries moved to end coal and nuclear power generation, and production from their gas fields deteriorated. Gazprom, a Russian state-controlled company, was supplying about a third of all gas consumed in Europe till the war in Ukraine disrupted supplies and highlighted the risk of over-dependence on one energy supplier. This shows that Europe would be heavily affected by Russia’s gas blockade.
European governments are increasingly concerned that rising energy prices could lead to social unrest and political instability.
Russia’s gas blockade has already impacted Europe. Inflation hits a record high, energy prices soar high, and gas prices are ten times greater than usual. This has provoked anxiety in Europe. Natural gas is used to heat about half of Europe’s households. It is a dominant source of energy for the region. The challenge is that, even if one considers Europe prepared for the scenario, there are still significant problems. One is that gas storage is not steadily distributed in Europe. Countries like Germany tend to have a higher share of storage. And Finland, for instance, has almost no storage; the United Kingdom has practically no storage. Thus, some nations are more exposed to the challenge.
A further challenge is being faced, especially in Germany and the Low Countries. This lower consumption means that high power-intensive sectors, whether fertiliser producers or a whole range of business trades, are looking at the expenses and not consuming as much, which means output is decreasing.
In March, the EU intended to reduce gas imports from Russia by two-thirds in a year, but it is facing difficulty getting arrangements on further measures such as an absolute import ban. Germany depends on Russia for almost half of its gas supply. It recently had to limit gas use in electricity production and appeal to citizens to conserve energy after Moscow cut some supplies. The supply disruption is also compelling Germany to use more coal-fired power plants. The UK is increasing its gas exports to continental Europe to support filling storage sites onward to the winter. The EU is also planning for longer-term energy freedom.
By March 2023, the euro-area economy will probably shrink by more than 2%, with GDP in Italy and Germany falling as much as 4% and 3%, respectively. If physical constraints obstruct gas flows, the uneven market approach suggests that the negative impact on economic output would be particularly significant. It can be as much as 6% for some countries in Eastern and central Europe where the intensity of Russian gas use is high and alternative supplies are scarce. This would be particularly true for Hungary, the Slovak Republic, and the Czech Republic. Italy would also face significant effects due to its reliance on gas in electricity production.
Likewise, the increase in demand for natural gas and the shortage in supply from Russia have caused a rise in energy prices. For countries like Italy and Germany, if Europe does not get sufficient Russian gas, it could be challenging, While Italy has been looking for alternate energy sources, Germany does not have as many alternatives, and it is estimated it could mean a 65% industry curtailment in Germany if flows stopped coming entirely. It is fundamentally hard to pivot away from piped gas. Unlike oil and coal, which can be rerouted, gas pipelines cost billions, take years to build, and physically connect producer and buyer directly, making them long-term commitments. That was the origin of Germany’s dependence on Russian gas, and it has only deepened over time. Today, as the world attempts to punish Russia through sanctions, that dependence is getting in the way.
In order to address the situation, EU energy ministers gathered in Brussels at the end of September to discuss measures to stop the gas and electricity prices surge. They are under pressure to protect businesses and consumers. European governments are increasingly concerned that rising prices could lead to social unrest and political instability. Europe has aligned all the alternate gas supplies it could: consignments of liquefied natural gas (LNG) that emanate by ship from the United States; and more pipeline gas from Azerbaijan and Norway. LNG is far more costly than pipeline gas, though. Germany is keeping coal plants in a process that it was going to close to reduce greenhouse gas emissions. It also is keeping the alternative of re-energising two nuclear plants that are set to shut down. The 27-nation EU has agreed on a plan to lessen gas use by 15% by next March; roughly the amount experts say is required to make up for the loss of Russian gas. However, those conservation measures are controlled in member states at present.
Regardless of the EU’s consistent emphasis on renewable energy, the crisis is forcing governments to reluctantly return to the use of fossil fuels. By 2030 Germany had planned to phase out coal entirely but is now forced to defer the project and immediately legislate to revive coal-fired power facilities as a temporary fix. The Dutch administration has reopened coal-fired power plants at full capacity to save natural gas that would otherwise be consumed to generate energy.
A Dark Future?
Russia’s invasion of Ukraine has further darkened the international growth outlook, with the European economy facing a grim setback given the energy, trade, investment, and financial repercussions. The EU’s economic driving force used to depend on Russia for more than half of its gas and about a third of its oil. By the summer, the dependence declined to 26% for gas and 12% for crude. Now, Europe is enduring a partial cutoff of natural gas exports from Russia, its biggest energy supplier. The standoff with Moscow led European states like Germany to double down on renewables and capitalise on LNG import facilities. However, it will take years for those other sources to come online. In the meantime, the management is bracing the heavily polluting coal plants and subsidising purchases from alternate energy suppliers to counterbalance the sharp fall in Russian gas imports.