Europe cannot take economic measures against Russia without thinking of blue flames. The European Union is so dependent on Russian natural gas that prolonged disruption of supply will cause enormous damage to the European economy. Such a situation could also put the Netherlands, which just next year wants to turn off the tap above the enormous Groningen natural gas bubble, in a difficult position.
Russia is a major producer of oil and gas, so it is not surprising that these raw materials became more expensive immediately after the war in Ukraine started. Within one day, Brent oil rose 8 percent on Thursday, and was paid more than $100 a barrel for the first time since 2014. Later the price fell back; By late Friday afternoon, a barrel of Brent fell below $94.
The reaction of the European natural gas market was more intense. A cubic meter of natural gas cost more than 1.30 euros on the wholesale market on Thursday afternoon, an increase of almost 50 percent within one day. There too, there was some peace on Friday and the price for a cubic meter fell to 1.03 euros.
Even before the war in Ukraine started on Thursday, energy specialists were talking in alarmed terms about possible consequences for Europe’s energy supply if – worst-case scenario – Russia blocked all natural gas exports to Europe in response to EU economic sanctions. Then “Europe has no chance to adapt”, wrote analyst Kateryna Filippenko from the oil and gas agency Wood Mackenzie Wednesday. “Factories should be shut down, inflation would spiral into an upward spiral. The European energy crisis could trigger a global recession.”
Until Thursday morning, the European gas market was actually in better shape than in recent months. The autumn had started with unprecedented shortages, partly caused by limited exports from Russia. The impending scarcity led to record prices in December, peaking at the end of December above 1.60 euros per cubic meter. Such expensive natural gas had previously seemed impossible – for a whole decade a cubic meter cost 10 to 30 euro cents.
But when the European winter subsequently remained largely free of snow and ice, and in addition ships carrying American liquefied natural gas docked in European ports because of the high prices, fears of gas shortages diminished. The price fell.
Due to the invasion of Ukraine, and especially the economic sanctions that followed, fear on the European gas market has suddenly returned. With one big difference: it is no longer a question of whether Europe will survive the winter well, but whether it can maintain its energy supply in the coming period.
Europe’s dependence on Russian natural gas was hardly a source of fear for many years. The country is the second largest gas producer in the world after the US and there have been gas pipelines to Europe for decades. But gradually imports from Russia increased – and Putin used delivery as a political tool.
While our own gas production in Europe, such as that in Groningen, is declining, the import dependence on Russia has grown to about 35 percent. And where the Netherlands ‘only’ gets 15 percent of its gas from Russia, Germany imports 55 percent and some Eastern European countries are more than three-quarters dependent on supplies from Gazprom.
World market tight
“In the spacious gas markets from 2015 to 2020, Europe had an advantage,” explains independent energy analyst Jilles van den Beukel. “Europe had alternatives where it could get its natural gas, but now the global market is tight.” Putin takes advantage of this by supplying Europe with less and less – an estimated 170 billion cubic meters came last year, compared to 200 billion a few years ago. “It pays for itself twice as much with rising prices.”
Many scenarios are conceivable for the consequences of prolonged lower Russian gas exports to Europe – and unrest about this is now driving the price up.
For starters, there’s the new pipeline to Germany, Nord Stream 2, whose opening appears to have been shelved for a long time by German Chancellor Olaf Scholz. Energy expert Frank Umbach, of the Liechtenstein think tank Geopolitical Intelligence Services, recently concluded that with this decision, 10 billion cubic meters of additional export capacity has already ‘evaporated’ this year. Without Nord Stream 2 and a steady gas supply via Ukraine, Europe will not be able to replenish its gas supplies sufficiently this summer, Umbach predicts. “That is likely to cause long-term shortages and high prices on the European gas market.”
Almost a quarter, 40 billion cubic meters of Russian gas for Europe, flows through Ukraine through pipelines. They were still functioning on Friday, according to the Ukrainian gas network operator. But the risk of disruptions is real.
Such a disruption would make Europe even more dependent on gas tankers from the US – and these only come at high prices. But the biggest risk is that Putin will (partially) cut off gas supplies to Europe in retaliation for economic sanctions.
Analyst Van den Beukel considers that chance small. According to him, the price increases on the natural gas market are significant, but they do not fit in with blind panic. He expects Putin to choose the “rational” path and stick to the long-term contracts for gas supply to Europe – at comfortably high prices for Russia. “He has to think about his future.”
Those future deliveries undoubtedly played a role in the sanctions announced on Friday. The Russian energy sector is somewhat affected by a European ban on the supply of equipment and parts for the Russian oil industry, but the far-reaching sanction to cut Russia off from international payment transactions has not been taken. That would have made it very difficult to pay for Russian gas and oil, with all its consequences.
Disable installations
Europe has little leeway if supplies do fall. Liquefied natural gas by ship cannot simply close the gap, if only because suppliers from the US and the Middle East have already largely sold their production to Asian countries via long-term contracts. And the global capacity to liquefy gas is not unlimited either. Then shutting down industrial installations, which Filippenko van Wood Mackenzie already speculated about, becomes a realistic prospect. And that can be the closure or production limitation of coal-fired power stations, which occurs in Germany and the Netherlands, among others, because of the CO2emissions, to be reconsidered. Even the definitive closure of nuclear power plants, which Germany strongly desires, could then become negotiable.
At that moment, perhaps even now, European member states will look at the Groningen field with a slanted eye. It is the largest natural gas field in Europe, containing more than 500 billion cubic meters. Technically, you can extract tens of billions of cubic meters in the coming year – as usual ten years ago. But the cabinet has ordered the regular extraction to stop next year. A few years later, the wells are closed permanently.
Van den Beukel cannot imagine that the cabinet is reconsidering the end of extraction. There is too much pain in the government for that. “But you can imagine that there is a request from Brussels. And then it will be a difficult decision to inject cement into all wells.”
A version of this article also appeared in NRC Handelsblad on 26 February 2022
A version of this article also appeared in NRC on the morning of February 26, 2022