The war in Ukraine brought back into focus an issue that had been known for a long time: Europe’s dependence on Russian gas. First, the possibility of European sanctions was raised, then Moscow reduced supplies, which caused panic in some Western capitals. What can Europeans do to escape Russian blackmail and how much should they fear the coming winter?
Russia threatens to cut gas supplies
It’s 6 a.m. and the needle has moved. After an hour, it stabilized somewhere close to 30,000 MWh/h. It's almost exactly where it was eleven days ago, before the shutdown, on July 10, 2022. German engineers breathe a sigh of relief.
What is this about? On July 10th, Gazprom initiated maintenance work on the famous Nord Stream 1 pipeline that brings Russian gas to Germany, under the Baltic Sea. The works entailed stopping all gas supply. The Europeans feared that once the works completed, the Russians would stop pumping anything through the pipeline, thus putting even more pressure on European gas supplies, and in particular on Germany, after Gazprom had stopped delivering gas to countries such as Finland, Poland, Denmark, Poland or Bulgaria, as they would not pay for their gas in rubles. Fears were disproved, the Russians resumed supplies. In the end, the resumption of supply also depended to a certain extent on the West, because an important component of the overhaul was a turbine repaired in Canada. But because of the war in Ukraine, Russia was under sanctions, and the Canadians hesitated for a while to return the turbine - which eventually happened, after the intervention of Germany, despite the public protest of the president of Ukraine, Volodymyr Zelensky.
The problem is, however, that a flow of 30,000 MWh/h is already below the approximately 70,000 MWh/h that Gazprom used to deliver in spring via Nord Stream 1. And at the time I am writing this, a dispatch is circulating among news agencies according to which Gazprom has just announced that it will halve this stream as well, starting Wednesday, July 27. The reductions, operated or in progress, come at a time when European countries are trying to secure larger stocks for the winter of 2022-2023 than for any previous winter. As announced by the European Commission, this time, by November 1st, 2022, the reserves will have to be at least 80% of the storage capacity of each member country. The goal is for Europe to get through the winter well, even if Russia stops its gas supplies altogether.
In March this year, European stocks averaged just over a quarter of capacity. Last month, in June, they had reached half and in the following weeks went up to two thirds. Then disruptions occured again, due to problems faced by one of the suppliers (Norway) and the high energy consumption in Western Europe, caused by the intensive use of air conditioning installations during the heatwave.
This was followed by maintenance work on Nord Stream 1, during which the suspension of deliveries was not compensated by an increase in the flow of the pipeline passing through Ukraine or the one passing through Belarus. So that, at the moment, there are countries that have approached or already exceeded the 80% threshold (Portugal, Denmark, Sweden), but there are also countries where the reserves are only half covered (Hungary, Bulgaria, Croatia, Latvia).
As for Romania, the stocks are slightly above 50%, but the authorities give assurances that by autumn they will comply with the recommendation of the European Commission by intensifying and diversifying domestic production. Prime Minister Nicolae Ciucă has said that by starting exploitation in the Black Sea, the domestic natural gas production capacity would increase by ten percent.
Part of the stocks secured in Europe came from liquefied gas imports. According to an analysis conducted by The Economist, last year Europe imported 20% of the liquefied gas sold on the world markets. This year, the European share has already reached 30%. For the most part, these are imports from Asia, made also on account of a lower demand from China, whose economy is not completely rebuilt after the Covid pandemic. At the same time, the European Commission is trying to bring other actors into play. This also includes the deal with Azerbaijan , which committed to double its gas exports to Europe by 2027.
Germany, the EU state most afraid of a “gastastrophy”. However, a complete stoppage of supplies would be costly for Moscow
Everyone knows, just by looking at the bills, that after the pandemic and the start of the second Russian aggression in Ukraine, in February 2022, the world economy has been facing an unprecedented energy crisis. Why does gas play a central role in this crisis? Gas is a stake for both the European Union and Russia. For the EU, the explanation lies in the fact that gas covers a quarter of the continent's energy demand. A third of this gas is supplied by Russia - or at least it was until 2021. On the other hand, gas is a major political wild card for Russia. Oil exports bring Moscow 10% of the GDP; gas imports, only two percent. With oil, the Kremlin cannot play, it is too important for the country's trade balance. With gas, on the other hand, it’s easier to play with the tap and keep losses under control. For this reason, Brussels also suspects Russia of “blackmailing” Europe with its gas exports.
But after the United States, Great Britain and the European Union began to wean themselves off Russian oil, it’s been difficult for Moscow to find new business partners. It made a deal with China, but at a much lower price compared to the one in the contracts with the Westerners. That is why the losses from the gas contracts with the Europeans can become significant for the Russians, especially at today's prices. Moreover, maintaining gas wells comes at a cost; all in all, gas export remains one of Russia's biggest businesses, even if it sits in the shadow of oil. In 2021, Russia collected more than 55 billion USD from natural gas exports, double than in 2020. According to some estimates, the amount would cover the expenses of at least two months of war in Ukraine.
Dependence on Russian gas is not evenly distributed across Europe. The most exposed economies are those of Germany, Italy and Austria. Germany in particular has based a large part of its industry on the use of cheap Russian gas, and not just recently, but since the Cold War. Until a little while ago, almost half of Germany's gas imports would come from Russia. The share today has dropped to 35%, but the German economy could go into recession if the Russians cut off the gas completely. And everybody knows that when the German economy sneezes, other European economies go into a coma. Many European businesses depend on industrial goods produced on gas in Germany. German politicians have so far sought to avoid the “gastastrophy”, as The Economist coined it, by saving, for example, the biggest German gas importing company from bankruptcy.
A helping hand extended to Germany, and implicitly to the other European economies, seems to be the Commission's initiative to reduce gas consumption at EU level. Brussels would like member countries to make plans to voluntarily reduce gas demand by 15% between August 2022 and April 2023. By saving in several places, resources are gathered for consumption where they are urgently needed. “Countries that do not depend on Russian gas must show solidarity with those that are forced to make efforts to save it due to the imminent risk of supply interruption” said the head of the European Commission, Ursula von der Leyen. It is not difficult to identify who she is referring to. The beneficiary of the austerity efforts will be Germany, while France, Spain, Portugal and Greece have already shown reluctance to the EU executive's proposal.
The bravado displayed at the beginning of the war in Ukraine, when European leaders announced sanctions against Russia, has received a stinging reply now that Russia is cutting off the gas and Europe has to take domestic measures. That is why, in the community plan for a controlled and rational decoupling from Russian gas, solidarity is a key word. This plan includes the co-opting of Great Britain and Norway. They are not EU members, but they are gas exporting countries that can play a role in stabilizing supply flows.
Then, the gas storage capacities of the member countries will have to be managed unitarily; gas mobility must be ensured, so that it reaches where is needed, from one part of Europe to another. An assumed hierarchy of consumption must be established, so that the last to suffer from a possible gas crisis are hospitals, schools, and household consumers.
Last but not least, even small individual gestures to save energy can count once added up at European level. This is also a way of rationalizing energy consumption, perhaps more effective than the rationalization imposed by the government, which can arouse the distrust of the population. Then, the efforts made now can be conjugated in the future to the wider European strategy of switching to green energy: Brussels had in mind the diversification of energy sources, especially in the direction of green ones, before the outbreak of the gas crisis this year.
The cost of European solidarity, felt more acutely by the poorer countries in the east
Much of the solidarity demanded by Brussels had already gone into action since last winter, before the war in Ukraine. And this is what we might call the billing solidarity. Individual European consumers pay the same price, regardless of how much and where from the national gas tank was filled. For example, in the case of Romania, where domestic production covers 90% of consumption, the gas used for heating private households costs the same as in France. At the same time, the government in Bucharest has done nothing to compensate the community market price of the gas more than the one in Paris, although the average salary in Romania is less than half of that in France.
In the meantime, last winter, the burden of the European gas solidarity was borne by the poor individual consumers in Eastern Europe, who made efforts to pay their three times higher gas bills compared to the winter of 2020-2021. And unfortunately, there is a high chance that this scenario will repeat itself in the winter of 2022 - 2023. In the discussions held these days by the European leaders, the Eastern European governments, including the Romanian one, should raise this issue too, because ultimately, by definition, Europe is a family where issues are addressed openly and democratically.
Although it is not entirely clear what impact this year's energy crisis will have, some trends are emerging. The needle indicating the pressure in the Russian gas pipelines will move increasingly feebly. It is the common result of the European energy strategy of weaning off Russia, but also of Russia's prophylactic actions. 2021 and 2022 have been good years for Russian gas exports, but that story is due to end sometime in the coming years too. The European Union will once again have to prove its solidarity and ability to manage the crisis as a community - something that, however, since the pandemic, it has had the opportunity to practice. The Economist gave the example of the vaccination strategy, which was a transnational one. The current energy crisis may turn out to be a more difficult challenge than that, but no insurmountable difficulties are seen in overcoming it. At least for now.
