In a recent article written for Bloomberg, Javier Blas looks at the extent of the EU’s dependence on Russian natural gas. It’s no secret that the number is high, almost 40 percent. But Blas also examines how much of that gas flows through Ukraine, and thus would be vulnerable in the event of intensified fighting in that country. He highlights the fact (something which is not well understood) that this amount has fallen by some 65 percent over the past couple of decades, as new pipelines have opened up offering different transit routes, a process that would continue if the Nord Stream 2 pipelines open for business (my guess: they will). The amount of gas that flows through Ukraine is still considerable, but Ukraine is, Blas explains, now “only” a key transit point for Russian gas into Austria, Italy, and Slovakia. (However, unlike much of the rest of the continent, Italy maintains strategic gas reserves.)
But that still leaves open the question as to whether Russia will (regardless of route) turn off the taps to the pipelines that supply Europe in order to put pressure on the EU in the event of a major conflict in Ukraine.
As has been widely discussed, Russia does appear to be playing games with existing supplies.
Blas:
Already, Russian gas flows into Europe are sharply lower than in the past, at times about 30% below the five-year average. Gazprom insists it’s fulfilling long-term contracts with European utilities. Indeed, last year Gazprom made 1.8 trillion rubles ($23.2 billion) from its sales to Europe — that is about 10% of all Russia’s exports, according to the International Monetary Fund. But the company is sidestepping another truth. This is less about money — Moscow makes more money from petroleum — than about geopolitical squeeze plays. In a departure from tradition, Gazprom hasn’t filled up its European storage sites. Neither is it selling extra gas on the spot market. Europe is running on fumes: Gas inventories have dropped to less than 40% of capacity, the lowest ever for this time of the year. Europe has only avoided a gas crunch thanks to unusually mild weather so far this winter.
And if Russia did cut off the EU, the consequences would be, to say the least, tricky. I looked at this in an earlier post, and Blas adds a considerable amount of (grim) detail:
As much as U.S. and European diplomats say they’re scouting the world for extra gas supplies, there isn’t enough available elsewhere to replace Russia. On the margins, Qatar and a couple of other LNG exporters may be able to help. LNG prices would rise so much that some Asian developing countries like Pakistan and Bangladesh would be priced out of the market, freeing extra cargoes to Europe (at the cost of blackouts in Asia). At best, Europe can hope to replace two-thirds of Russian supplies. That estimate may be generous.
Europe would also face an additional challenge. It’s one thing is to attract LNG cargos to its shores; another, and far more difficult, is to actually funnel that gas into the continent-wide distribution system. Nearly a third of European LNG regasification capacity is located in Spain, which has only a tiny pipeline connecting it with the rest of the continent. Add France and the U.K. to Spain, and that’s 70% of all European regasification capacity. Germany doesn’t have a single regasification plant.
The only recourse would be rationing — first with basic services like hospitals and residential heating, then electricity production, which would try to rely on coal and oil. After that, all the gas would run out and, eventually, all industries would have to shut down.
The economic pain would be tremendous, and would test European solidarity. “There is a risk that countries with better supply situations might be unwilling to share scarce gas resources with countries that are in an even worse situation,” argues Simone Tagliapietra at the Brussels-based think tank Bruegel. He’s right: As the Covid-19 crisis showed, countries may put national interest before regional one.
In the full-shut down, gas prices will skyrocket, making the record-high seen in December look piddling . . .
If any shutdown lasted more than a few days, I wouldn’t say that there is a “risk” that European “solidarity” (a somewhat nebulous concept at the best of times) would face a “test,” but a certainty. And I’m pretty sure that it would fail it, which would be another win for the Kremlin.
But would Putin actually turn off the taps?
Blas:
I have my doubts. The Russian President would prefer Europe remain tied economically to Russian gas forever. For Moscow, control of the spigots equals geopolitical influence in Europe; the ability to halt it serves the Kremlin better as threat than as reality. In many ways, it plays the same role as nuclear weapons in conventional warfare: mutual assured destruction or MAD. If Russia chose to use gas as a weapon, Europe would move heaven and earth in the next few years to never again rely on Gazprom for a single gas molecule. That’s why Putin is only slightly weaponizing gas — restricting supplies, rather than cutting them off.
That’s his leverage. If he goes apocalyptic, Russia’s own future would be at risk. It’s a weapon that works only by never using it.
The analogy with MAD is not unreasonable, and, alongside so much of the guesswork surrounding what happens next, it is a reminder of how much we are now into Cold War 2.0 territory. There may be some technical reasons why Russia would need to keep some gas flowing, but, even if the MAD analogy is not unreasonable, there is rather less “mutual” assured destruction than we may be expecting. Russia could manage for a while without European gas revenues. It has been building itself something of a financial fortress in recent years. Foreign-exchange reserves now stand at over $600 billion, and (another asset in a crisis not enjoyed by the U.S. or the EU) its debt levels are low. The EU, on the other hand, cannot realistically manage without Russian gas either in the short or medium terms.
Even if Europeans did move “heaven and earth in the next few years to never again rely on Gazprom for a single gas molecule,” (a separate debate) that is nothing they can realistically expect to achieve in anything other than the longer term, particularly if they continue their forced march to net zero greenhouse-gas emissions. Maybe a Russian gas embargo will overturn the politics of European and (as the U.S. would have to step up its own production to meet increased European demand) American energy politics. But even if it did, the dependence on Russia would still be likely to remain in place for quite some time.
And meanwhile (via VOA):
Gazprom, Russia’s giant state-owned energy company, is slated to finalize an agreement in 2022 for a second huge natural gas pipeline running from Siberia to China, marking yet another stage in what energy analysts and Western diplomats say is a fast-evolving gas pivot to Asia by Moscow.
They see the pivot as a geopolitical project and one that could mean trouble for Europe.
They are right.
For now, I would expect Moscow to keep playing its current games in the gas market, with Gazprom doing little or nothing to exceed its core contractual obligations. But if the EU responds to increased Russian aggression in Ukraine in a way that is more than an annoyance to Moscow (unlikely), I would expect to see those longer-term supply arrangements subjected to some “unexpected” interruptions, due perhaps to essential maintenance work, while Putin watches to see how people in Europe react to the difficulties that ensue.
Would they be prepared to freeze (or see their economies take a battering) for Ukraine?