Gas analysis in Europe

European Commission President Ursula Von der Lejen has announced plans to ban imports of Russian crude oil to most of the EU within the next six months, and of refined petroleum products by the end of this year.

But to have a significant impact on Russia’s budget, Europe must also end its dependence on Russian gas. And this will be much harder to achieve. Europe has managed to quickly reduce its need for Russian oil for several reasons.

Oil can be easily delivered by tanker, and not just through pipelines. It is also relatively easy to find new supplies in the world market. But the problem is that it is also relatively easy to find enough new buyers – and Russia has enough – to offset much of the losses from an EU embargo.

With gas the work changes. Europe needs natural gas to provide warmth to its citizens in winter, and to use it as a nutrient for the world’s largest chemical industry, which accounts for a significant share of EU exports. And some peculiarities of the natural gas market will make it much more difficult and costly to find alternatives to Russian supplies than to oil.

First, because most natural gas producers operate on long-term contracts with buyers, there is little production capacity outside Russia. While there are some markets where limited quantities of gas can be bought or sold, their purpose is to redistribute existing supply or demand across regions as needed, rather than to provide additional supply.

European energy ministers have visited various global gas producers, hoping to convince them to increase production. And the major gas producers are happy to do so. But they warn that it will take up to 4 years to implement the new projects, and these only work if the client is willing to sign a 20-year contract.

In the short term, this means that the natural gas supply is close to warranty. So the only way to compensate for the shortage of Russian gas is through a combination of energy savings and increased imports. But Europe will face another challenge.

Natural gas is costly to transport, and difficult to store. Transportable liquefied natural gas (LNG) offers the main alternative to Russian gas transported through pipelines, although it poses its own challenges.

Once the gas is liquefied and loaded into a special tank, the several thousand extra miles of travel do not make much of a difference. This is the main reason why Asian and European LNG markets are integrated, and prices on both continents are close to each other.

Gas prices reached very high levels since the autumn of last year, a few months before Russia invaded Ukraine. This is due to increased demand from the strong economic recovery in Asia.

Before the war in Ukraine, Europe imported almost as much LNG as gas through land pipelines. But if Europe wants to end its dependence on Russian gas, it must increase LNG imports to tremendous levels.

This would be costly, as it would mean diverting US shipments originally to Asia to Europe. Fortunately, this will be technically possible due to a large asymmetry in the LNG trade: it takes much longer to build gas liquefaction plants than to diversify natural gas supplies.

When LNG gas arrives, importing countries have to heat it in tanks. Energy specialists often point to the fact that many countries do not have enough LNG storage facilities to increase imports. But one option are floating LNG terminals.

And countries like Germany, France and Italy are already taking advantage of them. These flexible gasification facilities, together with a dense network of pipelines connecting most EU suppliers, offer some protection against Russia’s efforts to select specific locations.

Europe has already shown solidarity on this issue. When Russian energy giant Gazprom cut off gas supplies to Poland and Bulgaria in recent days, pipelines from Germany and Greece ensured that both countries received the amount they needed.

The question is whether Europe will show the same determination when all countries are under pressure. LNG storage facilities, on the other hand, are much more difficult to access and take much longer to build, as they require giant refrigerators that cool the gas to -160 ° Celsius.

This has two important political consequences. Some hope the United States can provide much-needed LNG to Europe. But the US currently has its full capacity of its liquefied gas liquefaction plants, and it would take several years to build new plants.

As long as US export capacity is limited, the reorientation of US gas shipments from Asia to Europe will do nothing to reduce excess demand in the EU-Asia combined LNG market. For the US, this has the advantage that domestic natural gas prices have remained much lower than in Europe or Asia.

Meanwhile, the challenge of building gas liquefaction plants significantly increases costs for Russia, which will try to export gas elsewhere that Europe is no longer buying. For several years, Russia would not be able to sell the 140 billion cubic meters of natural gas that used to go to Europe each year.

If Europe is willing to pay the cost of expensive LNG imports, it could severely damage Russia’s ability to earn a strong currency through gas exports. It would therefore cause real damage to Vladimir Putin’s war budget.

Note: Daniel Gros, board member at the Center for European Policy Studies. / “Project Syndicate” – Bota.al

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