Can Europe escape its looming energy crisis due to the Ukraine-Russia war?

The Russia-Ukraine conflict, euphemistically called a ‘’special military operation’’ by Moscow when it launched the offensive, more than 7 months ago was not expected to last more than a few days or weeks.  The fact that Ukraine has withstood the onslaught of the mighty Russian army, albeit with the support of armaments generously provided by the West chiefly USA, has come not only as a rude shock to Russia but also as a huge surprise to the world.

The whole world particularly the developing countries in Asia, Africa and Latin America, are suffering heavily due to the disruption in supply chains, and shortages and high prices of energy, food and fertilizers.

Europe’s Dependence on Russian Energy

Europe has also been severely impacted because of its heavy dependence on Russia for its energy requirements.

Europe is the biggest purchaser of Russian crude, receiving 138 million tons in 2020 out of Russia’s total exports of 260 million tons — or 53%. Europe, which imports almost all of its crude, gets a quarter of its supply from Russia. In theory, Europe could replace those barrels from suppliers in the Middle East, whose exports now mostly go to Asia, as well as source oil from the United States, Latin America and Africa. But it would take time for global markets to make that adjustment.

Russian gas makes up around a third of all-natural gas used in Europe. Among the continent’s major economies, Germany imports around half of its gas from Russia, while France obtains a quarter of its supply from the country. According to the latest available data, it is relying more heavily on Norway. Italy would also be among the most impacted major economies at a 46% reliance on Russian gas. The U.K., on the other hand, draws half its gas supply from domestic sources and imports mostly from Norway and Qatar. Gas used in Spain also comes from different locations, the biggest trade partners being Algeria and the United States.

Some smaller countries in Europe rely exclusively on Russian gas, namely North Macedonia, Bosnia and Herzegovina, and Moldova. Dependence also exceeds 90% of gas supply in Finland and Latvia.

It’s much more difficult to find alternative sources of natural gas because it is delivered mainly by pipelines. It is easier to find other sources for oil, which mostly moves by tankers and is traded globally.

Much of the Russian gas is exported via Nord Stream I pipeline. Capacity was expected to double early this year with the operationalization of the second pipeline—Nord Stream 2. However, before the second pipeline could start functioning, Germany halted its certification on 22nd February in response to the Russian decision to recognize the independence of the Donetsk and Luhansk People’s Republics.

The Brewing Challenge

At the beginning of the conflict, Europe was struggling to find ways to stop paying $850 million a day to Russia for its energy supply viz. $450 million a day for oil and $400 million per day for natural gas. EU leaders realized that reversing decades of dependence on Russian oil and gas is not a simple matter.

Reducing Europe’s dependence on Russian gas has been widely discussed for the past 15 years by EU leaders in Brussels. Despite alarm bells from a January 2009 crisis that led to the disruption of Russian gas transiting through Ukraine for two weeks, and Russia’s annexation of Crimea in 2014, Europe has not stemmed natural gas imports from Russia. In contrast, Russian gas deliveries to Europe increased post-2014. Europe also started importing Russian LNG from 2017.

Today Europe is struggling to contain an energy crisis that could lead to rolling blackouts, shuttered factories and a deep economic recession. Russia has choked off the supplies of cheap natural gas used by the continent for years to run industries, generate electricity and heat homes.

The crisis deepened over recent weeks when Russia’s state-owned exporter Gazprom closed Nord Stream I, the main pipeline carrying gas to Germany, blaming an oil leak and claiming the problem could not be fixed because of wide-ranging sanctions which restrict supply of spares and equipment to Russia. European officials claim that this represents the weaponization of energy by Russia which the latter vehemently denies. Europe is however convinced that this is energy blackmail, aimed at pressurizing and dividing the EU for its support to Ukraine against Russia’s invasion. To compound matters further, both Nord Stream I and II developed leaks ostensibly due to sabotage which has made them unusable for transportation of gas to Europe. Two powerful explosions tore apart the Nord Stream I and Nord Stream II natural gas pipelines on 26th September, 2022, severely testing five decades of Russia-Europe energy cooperation.

European Union energy prices had doubled since Russian President Vladimir Putin took Nord Stream 1 offline on 31st August, 2022, but now they are set to spike even higher. As Europe heads into winter, people are dimming the lights and switching off ovens because their most significant source of natural gas supply has been switched off. North Atlantic Treaty Organization (NATO) officials have called the explosion “deliberate, reckless and irresponsible acts of sabotage.” But it is still unclear who is responsible for them.

Various sources suggest it may have been Russia, Ukraine or even the United States—but no matter who carried out the attack, it certainly highlights how vulnerable Europe’s energy grid is. Targeted attacks on the energy sector have been increasing in recent years, but the Nord Stream attack takes things to a new level. These pipelines are made of thick steel, lie between 260 and 360 feet beneath the surface of the Baltic Sea and are protected by a cement casing. As risk analyst Peter Burgherr pointed out, only “state actors” have a realistic chance of destroying Nord Stream.

The Nord Stream attack is the type of incident that sparks wars. Former Central Intelligence Agency Director John Brennan thinks Russia is the most likely suspect behind the attack, arguing that Putin wants the explosion to be a signal to Europe that Russia can reach beyond Ukraine’s borders. Meanwhile, Putin is pushing the idea that “Anglo-Saxon” nations blew up the pipeline to hurt Russia’s economy. Other experts have even put forth the idea that Poland, Ukraine or one of the Baltic states may have blown up the pipeline in an attempt to sow division between Germany and Russia.

Regardless of who attacked the pipeline, as U.S. Secretary of State Antony Blinken told reporters, the sabotage is a “a tremendous opportunity to once and for all remove the dependence on Russian energy and thus to take away from Vladimir Putin the weaponization of energy as a means of advancing his imperial designs.” Many American energy officials undoubtedly hope that the developing strain between Germany and Russia will expedite a European realignment to America.

Europe’s Response

To effectively confront this challenge, Europe has lined up all the alternative gas supplies it could: shipments of liquefied natural gas from the United States (in March, the US and EU agreed to scale up American liquefied natural gas exports to Europe to 1,765 billion cubic feet per year starting in 2023), more pipeline gas from Norway and Azerbaijan. Germany is keeping coal plants in operation that it was going to shutter to reduce greenhouse gas emissions. It is also keeping the option of reactivating two nuclear power plants it was set to close. EU has approved a plan to reduce gas use by 15% by next March, roughly the amount experts say will need to make up for the loss of Russian gas. Yet those conservation measures are voluntary in member countries for now.

National governments have approved a raft of measures: bailouts for utilities forced to pay exorbitant prices for Russian gas, cash for hard-hit households and tax breaks. For example, Germany has approved a third support package with Euros 65 billion ($64.3 billion) in aid for consumers. Such spending will add to national deficits but will soften the downturn that economists are predicting for the coming six months.

More steps are coming. EU Commission President says a new proposal will include a price cap on natural gas and measures that could decouple the price of electricity from gas.

Perhaps most important in the short term, Europe has managed to fill 85% of its storage for winter with the help of LNG and diminished consumption because of high prices. Storage levels have kept rising even after the Nord Stream 1 cutoff. Partly as result, gas prices have fallen to their pre-cutoff level, although they are still painfully high.

Conclusion

The next half year is destined to be particularly challenging for Europe, not only in the battlefields of Ukraine but also in the hearths and industries across the continent.

Also Read: Despite Nord Stream 1 resuming gas supply, fear remains Russia may choke flows