Russia needs European cash more than Europe needs Russian gas

Overplaying your hand in energy markets rarely ends well. When Arab members of Opec announced an oil embargo as a result of the 1973 October war, importing countries raced to develop domestic oilfields and alternative energy sources, resulting in the most drastic decline in oil consumption the world has ever seen.

That fact represents a serious threat to Russia, should it seek to use its position as an energy supplier as geopolitical leverage after Thursday’s attack on Ukraine. While soaring prices of European gas and oil breaking through $100 a barrel may suggest that Moscow holds all the cards, its edge may prove fleeting. That’s because, for all that Europe needs Russian petroleum, Russia is far more dependent on European petroleum customers.

Of the roughly 465-billion cubic metres of gas that Europe consumed in 2020, Russian pipelines and liquefied natural gas (LNG) ports provided about 169-billion, more than a third of the total. That sounds like Moscow has the continent over a barrel — but the dependency is even greater in the other direction. More than 70% of Russia’s gas exports go to Europe.

Europe has another advantage. Scattered about a series of peninsulas on the edge of the Atlantic, it’s relatively easy to diversify its sources of supply by tapping the global LNG trade.

The bigger threat to Russia’s export market could come not from rival fossil fuel suppliers, but renewables. The EU’s plan to cut emissions 55% by 2030 will necessitate a rapid switch away from fossil fuels.

The continent has been slow to do that over the past decade, in part because of the expectation that Russia would prove a cheaper and more reliable supplier. Terminals in operation across the EU and UK are able to accept a total of 196-billion cubic metres per year, according to the International Gas Union — barely more than South Korea, and only about two-thirds of Japan’s capacity.

Making matters worse, they’ve rarely been used fully. Imports in 2020 came to just 89-billion cubic metres, leaving more than half of capacity idle. Boosting usage across the continent to the levels of 90% or so that are common in regions such as China, Belgium and Italy could roughly double the import total. 

That, indeed, has been happening in recent weeks, as thin spot pipeline deliveries from Russia have left European storage levels worryingly low. Imports have soared during January to hit roughly 100% of capacity, according to consultancy Rystad Energy. Some 56% of that total came from the US alone.

Maintaining that pace of imports will be easier said than done. Most LNG in the oceans is already contracted to customers, and the general global economic situation has left the market particularly tight, so there are precious few spare cargoes about to refill European tanks. More storage would need to be built in the long term to keep regasification plants busy through the summer months when demand is lower.

Still, neither of those problems would be impossible to solve in the medium term. LNG liquefaction plants take about three years to build, and there are projects awaiting investment sign-off sufficient to provide about 1,213-billion cubic metres to the global markets, according to the IGU. 

Russia, by contrast, has more limited trade options. Its only major piped exports beyond Europe and the former Soviet Union have been via the Power of Siberia pipeline, which has been sending gas to China from isolated fields close to Lake Baikal since 2019. Its successor, Power of Siberia 2, will be more consequential, giving the gas fields on the shores of the Arctic Ocean that supply Europe an alternative export route to China.

Still, if Moscow threatens Europe’s energy supplies now, Beijing — a government far more paranoid about its energy security — is likely to remain wary. (It’s telling, for instance, how adamant Gazprom has been that it’s fulfilling all its contractual obligations in Europe.) While LNG provides another route to exports, the extreme conditions that require a fleet of icebreaking tankers to get gas out of Russia’s northern ports mean it’s never going to be sufficient to replace the pipeline trade.

The bigger threat to Russia’s export market could come not from rival fossil fuel suppliers, but renewables. The EU’s plan to cut emissions 55% by 2030 will necessitate a rapid switch away from fossil fuels. That could lower the union’s gas demand in 2030 from the 392-billion cubic metres seen by the International Energy Agency’s status-quo scenario down to the region of 315-billion cubic metres. 

Part of that would be driven by a 20% decline in gas power generation that the IEA would expect to see in that situation — but that’s not the only thing that could change. The UK in October announced £3.9bn of funds to decarbonise heat and buildings and end installations of fossil-fired boilers by 2035. Switching such low-temperature applications to heat pumps and other low-carbon technologies could start to remove some 48-billion cubic metres of industrial gas demand in Europe within this decade, according to Anouk Honore of the Oxford Institute for Energy Studies.

Higher-temperature industry won’t be so easy to electrify, but green hydrogen produced by splitting water molecules with renewable power would do the job. The EU’s hydrogen strategy calls for the production of up to 10-million metric tons a year by 2030, equivalent to about 34-billion cubic metres — and the technology would be expected to scale up dramatically beyond that point. Add all that up, and it’s not hard to see how Europe could get by without Russian gas altogether.

There will never be a better time for Russia to reap the geopolitical dividends of its petroleum exports than the present — but that’s a fact that should be greeted at home not with triumphalism, but concern. The world is moving on from the fossil fuel age. Moscow’s recklessness in using petroleum for leverage will only accelerate that shift.

David Fickling is a Bloomberg Opinion columnist covering commodities, as well as industrial and consumer companies. He has been a reporter for Bloomberg News, Dow Jones, the Wall Street Journal, the Financial Times and the Guardian.

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