The gas crisis in Europe can avoid the worst case scenario

Gas pipelines are pictured in Amur, Russia November 29, 2019. REUTERS/Maxim Shemetov

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LONDON, Jan 28 (Reuters Breakingviews) – Russian President Vladimir Putin has added martial tension to Europe’s gas crisis. Europeans struggling with inflated prices from a post-pandemic supply crisis now face a possible invasion of Ukraine by the continent’s biggest gas supplier. While a conflict would clearly make matters worse, a range of factors can soften the blow.

The worst-case scenario, described by US administration officials Tuesday, is terrifying. Russia supplies about a third of Europe’s 450 billion cubic meters (bcm) of annual gas consumption, mostly through long-term contracts that pump it through pipelines via Ukraine, Belarus, Turkey and the Baltic Sea . If Putin turned off the taps following an invasion, or if Western countries imposed sanctions prohibiting all purchases of Russian gas, Europe would face a much more serious energy crisis.

The European Union and the United Kingdom produce around 60 billion m3 of gas per year, according to to data compiled by the Oxford Institute for Energy Studies. This is two-fifths less than in 2017. Meanwhile, Europe imports around 80 billion cubic meters of liquefied natural gas (LNG). While producers exported 500 billion cubic meters of LNG globally last year, meeting about a tenth of global gas demand, nearly 75% of that amount went to Asia. As a result, Europe entered winter with unusually low gas reserves.

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This gives Putin, who controls at least half of the 300 billion m3 of gas pumped annually in Europe through pipelines, additional leverage. Some analysts suspect it has already curbed supply. Russian exports passing through Ukraine this month are much weaker than usual. For European consumers struggling with gas and electricity prices that have quadrupled in the past year, further shortages could be economically catastrophic.

If Russian gas exports cease completely following an invasion, Russia could cope for some time. High oil and gas prices have swelled Moscow’s already sizable $800 billion in foreign exchange, gold and wealth funds. This creates a buffer against the closure of the main export market for an industry that accounts for nearly two-fifths of Russian budget revenue. But the shutdown would destroy Russia’s reputation as a reliable supplier and accelerate European governments’ efforts to reduce their dependence on imported gas by switching to low-carbon energy. Meanwhile, the potential fallout for European economies means that Western countries are likely to refrain from imposing a total ban on Russian gas purchases: the final blow is concentrated on the restriction of the financing of new gas projects.

A Russian invasion of Ukraine could still cut off the 40 billion cubic meters of gas that must pass through the country every year. But ICIS analyst Tom Marzec-Manser think Russia could redirect some of these exports via Belarus. Additional LNG imports could eventually cover part of the deficit. The United States already relies on sellers like Qatar and Australia and big buyers like Japan and South Korea to divert shipments to Europe. Meanwhile, soaring European prices have attracted LNG carriers like butterflies to a lamp. In recent weeks, the EU and UK have imported the daily equivalent of 500 million cubic meters, more than double last year’s level.

Corporate incentives are another factor. One of the reasons Russia pumped less gas to Europe than expected this month is that European industrial companies and utilities like Eni didn’t buy as much. Supply contracts with Russian giant Gazprom allow them to consume less than the mandatory supply if they can get it cheaper elsewhere. In December, the cost of buying gasoline a month in advance soared, creating an unusually large premium over the cost of buying from other sources in the spot market. This gap has now narrowed. As a result, European companies are likely to buy more gas from Gazprom next month, even as war concerns escalate.

None of this should make Europeans complacent. The uncertainty will keep gas prices high, increasing pressure on governments to help customers pay their utility bills. But the worst-case scenario in which the war in Ukraine forces large swaths of the bloc’s economy to shut down can be avoided.

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– European politicians could sanction new Russian gas projects if Moscow attacks Ukraine, the Financial Times reported on January 27.

– The plans, which have US backing, would restrict funding for new gas projects, according to people briefed on the talks, and are seen as a way to target Russia’s main industry while avoiding the near-term cost of exports Russian energy to Europe.

– The United States is in talks with major energy-producing countries and companies around the world about a potential diversion of supplies to Europe if Russia invades Ukraine, senior officials said administration on January 25.

– Speaking to reporters on a call, officials did not name the specific countries or companies they were in talks with to ensure an uninterrupted flow of power to Europe for the rest of the winter , but said they included a wide range of suppliers, including sellers of liquefied natural gas.

– Reuters reported earlier in January that State Department officials were discussing contingency plans with energy companies to ensure stable supplies in Europe if the conflict between Russia and Ukraine disrupts Russian supplies.

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Editing by Peter Thal Larsen and Oliver Taslic

Our standards: The Thomson Reuters Trust Principles.

Mary I. Bruner