Over the past two years, Europe has rapidly distanced itself from Russian energy commodities in protest of Russia's war in Ukraine. The European Union first imposed an embargo on Russian crude oil imports in December 2022, followed by an embargo on petroleum products (including gasoline and diesel) in February 2023.
Meanwhile, Russia's natural gas imports have fallen from around 450 million cubic meters per day (mcm/d) at the end of 2021 to around 150 million cubic meters/d now.
The remaining gas flows are roughly split between LNG, pipeline flows through Ukraine, and other pipeline routes (mainly via Turkey to Bulgaria, with smaller amounts flowing via Belarus to Lithuania).Europe has had an abundance of gas after two winters, despite drastically cutting back on imports from Russia.
European gasoline storage will be nearly 60% full by the end of the winter season in April 2024, a new end-of-winter record.
On the surface, this seems like an impressive feat, but it is belied by the fact that the continent has made little progress in reducing its supplies from Russia for almost two years, despite some countries calling for a complete phase-out of Russian energy resources, and with the war in Ukraine showing no signs of abating.
Indeed, energy commodity analysts at Standard Chartered report that no progress has been made in reducing imports since the Nord Stream pipeline system stopped flowing in. Conversely, European gas imports from Russia have increased by about 50% since the first quarter of 2023.
Ukraine's recent military incursion into Russia's Kursk Oblast has raised market concerns about gas flows through Ukraine, but StanChart believes these are overblown. In 2019, Russia and Ukraine signed a five-year pipeline transit agreement to supply natural gas to Europe. But Kyiv has indicated it will not renew the deal when it expires on December 31, 2024, while EU energy chief Kadri Simson has suggested the EU executive is “not interested” in pushing for a revival of the agreement.
Ukrainian gas accounts for 5% of the EU's total gas imports, and Aura Savadas, a senior analyst at market intelligence firm ICIS, told Politico that Austria, Hungary and Slovakia would likely be hit hardest if imports were halted. But Stanchart said there is enough room elsewhere to make up for gas flows via Ukraine. Commodity analysts note that non-Russian LNG flows to the EU have fallen by about 140 million cubic meters per day since April, and if they recover, they could make up for Russian LNG almost three times. Analysts say it is rather a matter of political will to exclude the last Russian molecule from the EU, which some European countries seem to lack.
StanChart's position is largely supported by research from Belgium-based economic think tank Bruegel, with some important caveats: Bruegel has done extensive research into what the EU would find itself in if Russian natural gas flows to Europe were cut off.
The main conclusion is that the EU can not only survive the next winter without Russian gas, but also avoid economic collapse. To achieve this, however, Europe would need to overcome severe technical and regulatory challenges, and would also need to cut its annual natural gas demand by 10-15%, as imports from outside Russia would not be enough to replenish storage in time for next winter.
First sanctions against Russian natural gas
In June, the EU approved sanctions against Russian natural gas, the first since Russia invaded Ukraine. According to Belgium, which holds the EU presidency, the EU plans to impose unprecedented sanctions on Russia's lucrative natural gas sector, measures that could drain hundreds of millions of dollars from Moscow's military coffers.
The decision comes after Germany and Hungary delayed an agreement for weeks, though the details of the agreements differ. As you might expect, the sanctions will not affect the majority of Russia's liquefied natural gas (LNG) exports to the EU. Instead, the proposed sanctions would prohibit EU countries from re-exporting Russian LNG after receiving it, and would also prohibit EU involvement in planned LNG projects in Russia. The sanctions would also prohibit the use of EU ports, finance, and services to re-export Russian LNG, essentially meaning that Russia would have to overhaul its LNG export model. Currently, Russia supplies LNG to Asia via Europe, with Belgium, Spain, and France as its main hubs.
“Without the ability to transship in Europe, Russia may be forced to make longer voyages in ice-resistant tankers,” Laura Page, a gas expert at data analytics firm Kpler, told Politico, adding that Russia “may not be able to offload as much cargo from Yamal because the ships cannot return as quickly.”
Norway and the United States have replaced Russia as Europe's largest gas suppliers. Norway supplied 87.8 billion cubic meters (billion cubic metres) of gas to Europe last year, accounting for 30.3 percent of total imports, while the United States supplied 56.2 billion cubic meters, making up 19.4 percent of total imports.
Article by Alex Kimani of Oilprice.com
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