A drilling rig at a gas processing facility, operated by Gazprom.
Maxim Chemetov | Reuters
Analysts say the European Union’s best chance of replacing Russian gas imports this year is likely to miss the mark, putting further pressure on the region’s economy.
The EU plans to replace two-thirds of Russian gas imports by the end of the year as Russia’s war in Ukraine continues to rage.
The abandonment of the country’s gas supplies has become even more urgent after state-backed Gazprom cut flows to Europe by 60%, citing a delay in repairs to the Nord Stream 1 gas pipeline that connects the Germany under the Baltic Sea.
EU Energy Commissioner Kadri Simson will meet EU energy ministers on Monday to discuss possible coordinated measures, including demand reduction and contingency plans if the situation deteriorates further.
However, the current EU plan to replace Russian gas appears to be failing.
In 2021, the EU imported around 155 cubic meters (bcm) of natural gas from Russia. The gas replacements proposed by the bloc by the end of 2022 – which include LNG (liquefied natural gas) diversification, renewables, heating efficiency, pipeline diversification, biomethane, solar rooftops and heat pumps – amount to around 102 billion m3 per year, according to data from the EU Commission’s REPowerEU, aggregated in a recent report by economic consultancy TS Lombard.
Christopher Granville, managing director for EMEA and global policy research at TS Lombard, said in the report that the European Commission’s targets to replace Gazprom’s gas this year appear “extremely optimistic”.
“In addition to the implementation delays for the commissioning of German LNG receiving terminals, Russia is also a major supplier of LNG, highlighting the challenge for Europe to source adequate LNG,” Granville said. .
The share of Russian gas imports into the EU has already fallen from 45% in April 2021 to 31% in April 2022, with the share of the pipeline alone falling from 40% last year to 26% this year.
However, total LNG imports reached record highs, with 12.6 billion cubic meters imported in April alone, representing a 36% year-on-year increase despite Russia’s reduced share. This would indicate that Europe’s diversification efforts are beginning to bear fruit.
A European Commission energy spokesman told CNBC on Thursday that Gazprom and Moscow were using energy supplies as a “tool of blackmail.”
“Following Gazprom’s earlier unilateral decision to stop delivering gas to several Member States and companies, and at the below average level of its gas storage facilities in Europe over the past year, the latest measures remind us once again of Russia’s unreliability as an energy supplier,” the spokesperson said.
“They also reinforce our resolve to achieve our REPowerEU goals of phasing out Russian fossil fuels. Russian coal and oil sanctions come into effect this year, and with the REPowerEU plan, we will accelerate the deployment of local renewable energy , reduce energy consumption and switch to more reliable alternative suppliers than Russia.”
Efforts by the European Commission and member states to diversify away from Russian fossil fuels saw them last week sign a memorandum of understanding with Egypt and Israel for eastern Mediterranean LNG exports.
“We have agreed on a joint statement with Norway to intensify our cooperation to deepen our long-term energy partnership and we will work to secure additional gas supplies in the short and long term, to cope with the high prices energy and to cooperate on clean energy technologies”, he added. the Commission spokesperson told CNBC.
“We are also working with other alternative energy providers such as the United States, Qatar and Azerbaijan, to name a few examples.”
However, TS Lombard’s Granville predicted there could be significant financial implications for Europe as it looks elsewhere for gas supplies.
“[The EU] will pay more on average for his [non-Russian] oil and gas than its peers. Asian countries will buy more Russian oil at discounted prices,” Granville predicted.
“LNG imported by Europe from the United States will cost more than the price paid by American consumers due to transport and liquefaction/regasification costs.”
It could hit Europe’s economy hard, at a time when it is already struggling, given the so-called “eternal sanctions” against Russia, as the war drags on.
Another potential stumbling block for the region’s economy is the possibility of a complete embargo on Russian gas supplies. This is something that already worries European policy makers.
In a research note on Tuesday, Takahide Kiuchi, an economist at the Nomura Research Institute, pointed out that “if the situation were to worsen in the future…then it is quite possible that the EU will go so far as to ban import of Russian natural gas”. .”
“With the G-7 having now decided to ban imports of Russian oil, it is likely that Russia will widen the scope of its natural gas cutoff to other EU countries as a retaliatory measure,” he said. Kiuchi said.
“In this case, one could even assume that the EU will try to take the first step and stay one step ahead of Russia, by declaring a ban on imports of Russian natural gas.”
By bringing natural gas into the realm of EU sanctions, the eurozone economy could see a sharp slowdown, with Germany’s growth rate turning negative, Kiuchi suggested.
More generally, the International Monetary Fund has indicated that escalations of existing sanctions against Russia by major industrialized countries – particularly if they lead to severe restrictions on Russian energy exports – could result in even greater increases in oil prices. energy, damaging business and household confidence and disrupting financial markets.
The IMF predicted that such a sequence of events could lower its forecast for global growth by as much as 2%.