How dependent is Europe on natural gas and who are its main suppliers
(The conversation)-The prospect of a conflict between Russia and NATO countries over Ukraine raises fears of an energy crisis in Europe. Russia supplies nearly half of Europe’s natural gas, and some leaders fear Moscow could tighten the flow if hostilities break out. To weaken Russia’s influence, the Biden administration is working to secure additional gas shipments to Europe from other sources. Expert in global energy policy Amy Myers Jaffe explains the amount of gas available and what is involved in redirecting it.
How dependent is Europe on natural gas and who are its main suppliers?
Natural gas accounts for around one fifth of all primary energy used in Europe. It accounts for around 20% of electricity production and is also used for heating and industrial processes.
Russia is Europe’s largest supplier of natural gas, shipping around 40% of the continent’s supplies via pipeline. Next come Norway (22%), Algeria (18%) and Azerbaijan 9%. Europe also receives natural gas which is liquefied and delivered by ship.
In recent months, European imports of liquefied natural gas, or LNG, from the United States and elsewhere have reached record levels of around 400 million cubic meters per day. To put that into perspective, a single LNG cargo ship can hold around 125,000 to 175,000 cubic meters of natural gas, enough energy to heat 17 million UK homes on a winter’s day.
What are the main constraints faced by exporters to send more gas to Europe?
LNG is made by cooling natural gas to minus 260 degrees Fahrenheit (minus 162 degrees Celsius), which reduces its volume by one factor over 600. Natural gas is brought to a port, processed in a liquefaction plant, then loaded into specialized insulated, temperature-controlled tankers for shipment by sea.
To receive LNG, a port of discharge must have a regasification plant that converts the LNG back into gaseous form so that it can be sent by pipeline to end users. Liquefaction plants and regasification plants cost billions of dollars and take many years to build.
Following a similar crisis in 2009, when a financial dispute with Ukraine caused Russia to suspend gas shipments for 20 days, Europe dramatically increased its number of regasification facilities to 29. It currently remains room at European regasification receiving terminals to import more LNG, and plenty of storage space to store imported supply virtually indefinitely. But many of the world’s major suppliers are maxed out, with little capacity to produce and liquefy more natural gas than they already transport.
The global LNG market has a certain flexibility. About two-thirds of all LNG is sold under long-term firm contracts with fixed destinations. Some big contract holders like South Korea, Japan and China and their suppliers are ready to redirect shipments to Europe if a further cut in Russian exports worsens the supply crisis.
Have suppliers ever rerouted shipments this way?
The main example occurred in 2011 when a tsunami triggered a meltdown and radiation release at Japan’s Fukushima Daiichi nuclear power plant. Japan shut down all of its nuclear power plants to assess whether they were prepared for similar disasters. LNG suppliers diverted gas shipments to Japan to help weather the immediate crisis.
Today, analysts say LNG producers or importers may be able to redirect cargoes that could make up around 10-15% of any shortfall. Yet such changes would likely come at high prices, leaving European consumers with an even higher bill than they currently face.
Will increased US LNG shipments to Europe drive up prices for US consumers?
Existing US LNG export facilities have been operating at full capacity for several months. About half of U>S>LNG shipments in December 2021 were destined for Europe, boosted by rising prices in European markets. Previously, a larger share of U.S. LNG exports sailed to China, where drought-related constraints on hydroelectric power created a surge in demand for natural gas.
In other words, US sellers were able to supply more gas to Europe by diverting export shipments, rather than selling gas that would otherwise have been used domestically. In my opinion, if natural gas prices in the United States rise over the next few weeks, winter weather will likely be a bigger driver than LNG exports.
Wouldn’t Russia damage its own economy by cutting off gas exports to Europe and losing those revenues?
In recent years, Russia has structured its federal budget in a way that has allowed it to store US$630 billion in foreign exchange reserves – cash held by the central bank in other currencies for discretionary use, somewhat such as individual savings accounts. Russian leaders can use these funds to deal with any new sanctions or unexpected oil price changes.
For example, last year the Kremlin based its spending on a conservative estimate of the breakeven oil price of $45 a barrel, giving itself some leeway. Ultimately, oil prices in 2021 averaged $71 a barrel, providing a sizable fiscal windfall.
Through this fiscal strategy, Russian President Vladimir Putin has amassed a war chest to weather any new rounds of sanctions, or even the complete loss of natural gas export revenue from Europe for some time.
Still, any Russian decision to cut off gas exports to Europe could have longer-term consequences. Putin might have hoped that his talk about natural gas and the high prices it caused would convince Europeans that Russian gas is vital and cannot be easily replaced by renewables. But ironically, this tactic may already have created a lasting distaste that is accelerating Europe’s pivot to offshore wind, Euro-North African hydrogen hubs and US LNG.
Gazprom, the Russian company with Europe’s largest gas export footprint, could also find itself adrift in a sea of lawsuits and steep penalties for breaking contractual commitments following a cut. This in turn could affect the Russian people, who also rely on Gazprom’s solvency for their winter fuel for heating.
Putin may be willing to bet that an energy price crisis in Europe will sow popular discontent, stall the energy transition and help Russia win concessions on NATO troop and missile positioning. But there is little evidence that Europe will react this way. Although Europe’s shift to renewables will take time, it will still be bad news in the long run for Russia, which has 1,688 trillion cubic feet of natural gas reserves to tap for 100 years of supply. .