How a Ukraine conflict could reshape Europe’s reliance on Russian energy supplies

Europe relies on Russia’s natural gas to help heat millions of homes, generate electricity and power factories. With Russian troops massed along Ukraine’s border, the Continent’s heavy dependence on Russia is limiting its diplomatic options and threatening to throw its energy supplies into turmoil.

If the flow of gas is interrupted, either as collateral damage from warfare or as a negotiating tactic by President Vladimir Putin of Russia, experts worry that already high prices in a constantly shifting global market could skyrocket. Businesses may be forced to temporarily close, and if cutoffs persist, households already facing higher utility bills this winter could feel even more pain.

Analysts and industry executives are sceptical that Putin would cut off gas, in part because of how important gas exports are to his country’s economy. But the tensions come at a pivotal time for many European nations that have turned to natural gas to help them bridge their transitions from fossil fuels to wind, solar and other cleaner sources.

Diplomatic proposals to counter Russia’s buildup centre on sanctions that could limit energy trade. That could throw billions in investments and oil and gas contracts into jeopardy, especially for countries, including Germany and Italy, that rely on Russian gas more than others.

Germany, which is at the centre of the diplomatic standoff, is Moscow’s most important customer. The bulk of the gas to Germany flows directly from Russia through a large pipeline in the Baltic Sea known as Nord Stream. A second pipeline, Nord Stream 2, was recently completed at a cost of $11 billion.

Fuel has yet to flow through Nord Stream 2. US lawmakers in recent months have called for blocking its opening, as critics warn that the new pipeline could allow Moscow to wield greater influence over the Continent and starve Ukraine of transit fees through its existing pipeline network that is crucial to Kyiv’s economy.

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President Joe Biden has said Nord Stream 2 will not go forward if Russia invades Ukraine. But in an indication of how the politics and business of energy are intertwined, the pipeline’s operating company is chaired by a former German chancellor, Gerhard Schröder.

Several large pipelines bring Russian gas into Europe, where it flows through a vast interconnected network. The amount of gas crossing Ukraine has declined sharply over the past decade, though it remains an important route. Other conduits are the Yamal pipeline through Poland and TurkStream, which feeds Turkey but also brings gas into Southern Europe.

In 2021, 38 per cent of the natural gas used by the European Union came from Russia, according to Bruegel, a research organisation. Some countries, like Poland and Lithuania, have been gradually reducing their reliance on Russian gas. For others, the dependency has been steadily growing.

If the gas does stop flowing, importing countries would need to find other sources. Some of the differences would most likely be made up by bringing in more liquefied natural gas from sources around the globe.

Liquefied natural gas is made by chilling gas to around minus 260 degrees Fahrenheit (minus 162 degrees Celsius) so that it can be converted into liquid form and loaded more easily onto ships. The great advantage is that it can be transported stably from great distances, including from Australia and the United States — offering viable alternatives for local or regional sources.

In recent months, Europe has been witnessing a kind of dress rehearsal for a cutback in Russian gas as Moscow curtails shipments to Europe in what some analysts and politicians say is an effort to keep prices high. According to the International Energy Agency, Russia cut its gas exports by pipeline to Europe by 23 per cent in the last quarter of 2021 compared with the same period a year earlier. At the same time, imports of liquefied gas have been on the rise.

In reality, gas markets are far from static, with volumes and the direction of flows largely dictated by price. And while the crisis has not yet led to any military action, the threat of conflict has been weighing on markets. Prices in Europe were already high to end the year as limited storage levels raised concerns that there would be enough fuel to last the winter.

While they have since eased from the records hit in December, they are still roughly four times what they were a year ago.

This article originally appeared in  The New York Times.

Josh Holder, Karl Russell and Stanley Reed c.2022 The New York Times Company

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