As European states and the President Biden administration are concerned that a Russian military campaign in Ukraine is imminent, another concern remains: How would Europe cope with its dependency on Russian gas in case of conflict?
The European Union relies on Russia for about half of its natural gas imports and more than a third of its overall gas needs. Most of this gas is contracted from the Russian state gas company, Gazprom, and arrives via gas pipelines: the Ukrainian pipeline system, the Yamal through Poland and Belarus, Nord Stream 1 underneath the Baltic Sea, and Turk Stream under the Black Sea. A private Russian company, Novatek, is also making inroads into the European energy market with liquefied natural gas (LNG) exports.
When (and if) the Nord Stream 2 pipeline is certified and operational (it was completed in 2021) it would be another direct route for Russian gas to Europe, replacing much if not all the Ukrainian pipeline system. The Nord Stream 2 pipeline arrives at Gazprom’s largest European gas market, Germany, with intention of cutting transit states like Ukraine out of the business.
Different European countries have very different levels of dependence on Russian gas. Some countries, Norway and the Netherlands especially, have domestic gas production capabilities. Some have LNG import capabilities and are able to tap into the global markets. Some are well interconnected with other countries via numerous pipeline systems. Other countries have no domestic production capacity, no access to LNG markets, and are dependent on a small number of pipeline systems.
A new Russian military campaign in Ukraine could result in the interruption of European gas supplies for several reasons. First, there is a real concern that a full-scale attack could damage the Ukrainian pipeline system, interrupting the main export route of Russian gas to Europe. Even though construction of the Nord Stream 2 pipeline is completed, until the German government allows gas to start flowing through it, both Russia and Germany are dependent on the Ukrainian pipelines. The full implications of disruptions to that system are still uncertain. On the one hand, an active Russian military campaign may delay or prevent the European certification of the Nord Stream 2 as a form of punishment to Moscow. On the other hand, being left without a key supply route of gas, some European countries may push to speed up Nord Stream 2 operations.
Even if the Ukrainian pipeline system is not damaged during the conflict, it is quite likely that Russia will severely reduce supplies via the Ukrainian pipeline system, or even cut off supplies entirely. Moscow’s goal in pursuing Nord Stream 2 and has been to eliminate politically non-cooperative energy transit states. Moreover, a cut during the conflict would put pressure on the Ukrainian government, society, and economy.
Washington and European powers have discussed sanctioning Gazprom in the case of military conflict. However, stopping all Gazprom gas deliveries to Europe remains largely unrealistic, and support for such a step would not be widespread in Europe. Europe has already experienced a gas crunch since last fall as Gazprom reduced delivery volumes. Prices soared and countries had to draw down on their gas reserves. It is highly unlikely that Europe would want a more acute gas shortage, especially in winter.
If Europe does experience a cut or interruptions in the gas supply from Russia, how painful will the impact be?
First, it’s important to realize that the European gas markets of 2022 are far from the same as they were in the 2000s. After Ukrainian-Russian gas tensions, a gas shut-off in the winter of 2008-09 resulted in gas shortages for weeks in the Czech Republic, Romania, Austria, Poland, Croatia, and Slovakia. Poland even had cases of civilians freezing to death due to lack of gas-dependent heating.
Since then, the European Union has mandated gas storage requirements for member states. It has also invested in interconnecting pipelines and reverse-flow capabilities among neighboring states. Infrastructurally isolated “energy islands” like those of the Baltic States have integrated into the European energy markets. As a result, in case of a shut-off like 2008-2009, many European states would have access to gas supplies via a different route.
The main mitigating factor, however, is the LNG market. After witnessing the vulnerability of the pipeline system, counties like Poland, Lithuania, and Finland, where Gazprom previously held a monopoly, built an archipelago of new LNG import terminals. Now, European LNG terminals have the capacity to meet 40 percent of Europe’s gas demand. Europe’s LNG imports have risen consistently, and in the first quarter of 2021 accounted for nearly 20 percent of the EU’s total gas imports.
LNG can be more expensive than pipeline gas under normal circumstances due to the expense inherent in super-cooling the gas to liquify it, transporting it in liquid form, and converting it safely back into a gas for heating and energy. While American LNG has been price competitive with Gazprom’s piped gas, the difference in price between LNG and pipeline gas could increase if large swaths of Europe suddenly demand enormous quantities of it. While in theory, LNG could fill the gap left by a pipeline cut-off, financing the stop-gap will be a challenge for households, companies, and governments.
Europe’s reliance on LNG is only expected to grow. By 2025 Europe is projected to account for nearly 15 percent of global LNG demand. So in case of a gas cut-off, Europe could turn to local gas producers as well as to other major global exporters. In 2021, the leading suppliers of LNG to Europe were the United States, Qatar, and Russia—and these exporters are expected to maintain their positions going forward.
The role of the United States within the global LNG markets is particularly significant. In the past 10 years, the United States emerged as the world’s top gas producer and leading LNG exporter. It not only added greater liquidity and volumes to the market, but also changed the gas business by eliminating destination clauses (contract clauses that prevented resale of gas ), delinking the price of gas from oil, and increasing sales in the spot market and on short-term contracts. Gazprom had resisted these changes for decades.
As a leading NATO power and energy superpower , the United States could support its energy-vulnerable allies in Europe. This support is unlikely to be formal, but rather will be driven by market forces.
American gas producers are commercial entities—many are small-scale, independent companies. American LNG export terminal operators are also private entities separate from the gas producers themselves. President Biden’s administration can’t dictate LNG export terms, prices, or volumes to the private American energy companies or the multi-national conglomerates. This is in stark contrast to countries like Russia, where Gazprom is operated under the watchful eye of the Kremlin, pursuing not only commercial but also political aims.
Even though American LNG exports are subject to market forces, Washington is already negotiating with the key stakeholders. In January, State Department officials spoke with the European Commission and several international energy companies regarding their contingency plans for supplying Europe in case of disruption of Russian supplies. These conversations have also taken place with friendly, LNG-producing countries like Qatar.
Where does that leave the European markets in case of a Russian invasion of Ukraine? An interruption or reduction of gas supplies via the Ukrainian gas pipeline system remains very likely. As a result, gas prices would increase and countries would draw dawn on gas reserves. However, a severe gas shortage is unlikely. Europe today can access the global LNG markets, including supplies from the United States. It will cost European consumers, industries, and governments as they will compete for supplies with energy-hungry Asian markets and the rest of the world. The price of heating Europe will be steep, but the gas crisis will be manageable.