From the Editor: Brussels takes aim at Russian LNG [Gas in Transition]
Europe had no control over the loss of its pipeline gas supply from Russia. Brussels’ response to Moscow’s invasion of Ukraine was to announce an ambitious plan to get off Russian gas as soon as quickly, targeting a two-thirds decrease in pipeline supply from the country by the end of 2022, and eliminate those imports entirely well before the end of the decade. But it was Moscow that moved first and drastically cut flow, first by cutting off any customers that refused to pay in rubles, and then by curtailing supply over last summer via the Nord Stream 1 pipeline.
The Kremlin bet heavily on Europe enduring a difficult winter, hoping this would force its leaders to reduce support for Ukraine and press on Kyiv to go to the negotiating table. But the European winter was very mild, the continent managed to outcompete Asia for ample LNG supply, and EU efforts to stock up gas before the weather got colder were successful. As a result, even though Russian pipeline gas supply to Europe is at only 10-15% the pre-war level, gas prices, though still high, have fallen back to the pre-war level.
Now the EU is once more targeting Russia’s gas, but this time in LNG form. Even while Russian pipeline gas to the bloc slumped last year, the country’s LNG supplies soared, by 31% to 19.2bn m3. That means Russian LNG supply to Europe is not that much than current Russian pipeline supply, which came to 2.3bn m3 in March, or 27.6bn m3 on an annualised basis.
That growth in Russian LNG, as cargoes were diverted away from Asia to fetch a higher price, helped ease European gas prices. The fact that there were growing calls to block those supplies when, as International Energy Agency (IEA) head Fatih Birol notes, Europe is “certainly not out of the woods yet,” should be cause for alarm for a number of reasons.
Targeting Russian LNG
EU member states agreed to explore a legal option in late March to prevent Russian companies from booking LNG infrastructure capacity, and the proposal appears to enjoy the support of the European Commission, which must come up with a way of implementing it.
“We can and should get rid of Russian gas completely as soon as possible, still keeping in mind our security of supply,” EU Energy Commissioner Kadri Simson told EU lawmakers in early March. “I encourage all member states and all companies to stop buying Russian LNG, and not to sign any new gas contracts with Russia once the existing contracts have expired.”
Some member states have already taken their own steps. The Dutch government plans to phase out volumes of Russian LNG bought under existing contracts, energy minister Rob Jetten told Bloomberg in an interview in early April. The government has already committed not to sign any new contracts for Russian LNG.
The Dutch decision will have implications for neighbouring states, as the Netherlands is an important transit country for LNG shipments to elsewhere in Western and Central Europe.
As Anne-Sophie Corbeau, expert with the Center on Global Energy Policy at Columbia University, notes, the impact of Europe restricting Russian LNG imports might be limited if there is a “perfect swap.” That is to say, any Russian LNG that does not go to Europe simply goes to Asia, and then other suppliers that would have sent their LNG to Asia, deliver it to Europe instead.
“As Yamal LNG is closer to Europe than to Asia, this tightens the global shipping market during the winter season due to longer shipping routes to Asia when the northern route is unavailable,” Corbeau said in a blog post in early April. “It also affects the transshipment of Russian LNG from nuclear icebreakers, which typically takes place in Belgium and France. The impact on gas prices is limited.”
Alternatively, though, she warns there may not be a perfect swap, and that “China’s LNG appetite grows and Chinese companies compete with spot LNG going to Europe.”
“Faced with lower LNG supplies, Europe is forced to weigh on demand while gas prices increase,” Corbeau said.
The expert also flags up the risk of a Russian retaliation to any move to restrict its LNG imports. After all, Moscow showed it was perfectly willing to do this when the EU moved to scale down its dependence on Russian pipeline gas over the years to come.
“A first obvious move could be to cut Russian pipeline gas volumes flowing through Ukraine and then through TurkStream, removing around 20bn m3/yr of pipeline gas,” Corbeau explained. “Whether or not Europe achieves the perfect swap (mentioned above) in terms of LNG supplies further impacts Europe’s gas balance. Any cut by Russia to its LNG supplies is a far more worrying move. Yamal volumes contracted by European companies (but not by China National Petroleum Corporation and Russia’s Novatek) could be cut by Russia shutting down one train (roughly 8.8bn m3/yr). Russian LNG (45bn m3 in 2022) is needed for the global gas balance, to avoid a return of sky-rocketing spot LNG prices.”
Regardless of whether the EU moves to restrict Russian LNG or not, Europe must be prepared for a further cut in gas supplies.