19.12.22 Review

Opium For Europe: lack of a competitive alternative to Russian gas makes pragmatists discuss the hypothetical possibility of its return to the European market

Putin's geopolitical ambitions and the unleashed war have almost destroyed the fifty-year gas alliance between Russia and Europe, which was based on cooperation between the USSR/Russia, primarily with Germany. However, replacing Russian gas will take time and require long-term guarantees for new suppliers. Yet even then, the gas would become more expensive, and this would reduce the competitiveness of German industry — the economic powerhouse of Europe. A survey of experts published by Bloomberg has shown that a significant number of them believe Russian gas can return to the European market once the war is over. However, politicians and other experts are looking for scenarios that would exclude this possibility.
Back in 2021, Russia supplied the EU with 155 billion cubic meters of gas, just a little more than 40% of its total gas needs. Between January and August 2022, the EU received from Moscow 39 billion cubic meters less gas than the previous year; by December, supplies from Russia covered only 7.5% of the EU's needs. The Europeans had to urgently look for new suppliers and take emergency measures, and as a result, they were able to cope with the critical threat by paying a high price. It means not only failing living standards. Cheap Russian pipeline gas was the key to the competitiveness of German industry, which in turn is the locomotive of the entire European economy. Alternative supplies would in any case be much more expensive, and therefore would reduce Europe's competitiveness in the long term.

From this perspective, the issue of returning Russian gas to Europe does not look completely closed — the interests of the European economy as a whole are tied to it. A survey conducted during a conference organised by the Oxford Institute for Energy Studies showed that 40% of the participants (energy executives, senior officials, and industry consultants) believe that in the future Russia could once again become the main supplier of gas to Europe. The other 40% of respondents thought that this would not happen under any circumstances. The poll results became the subject of a sensational publication by Bloomberg.

This year, Germans pay on average about 140 euros per megawatt hour of gas (at some points the price on the stock exchange was reaching 300 euros), which is about seven times the average value from 2010 to 2020. Because of this, Berlin has to spend billions of euros on subsidies for industry and households. Liquefied natural gas suppliers from America and Qatar are not able to offer prices comparable to Russian ones. Among other things, without cheap gas from Russia, it would be more difficult for the EU to make the energy transition and develop hydrogen energy (we have already written about this).

Obviously, such arguments are only relevant if the war is over and the Russian political regime changes. However, even in this case, it looks unprincipled in the eyes of consistent supporters of reducing dependence on Russia. Experts of the American Atlantic Council believe that the EU can refuse Russian gas and find new partners with acceptable prices. The policy of consolidated gas purchases should become the key element of the EU strategy: in this case, the European countries will not compete with each other and will be able to set a single price "ceiling". This will significantly strengthen the EU's negotiating position. Experts believe that the "ceiling" of 275 euros per megawatt-hour will not exacerbate the deficit in the market, but will give a clear signal to the importers. 

So far, this strategy has encountered peculiarities of decision-making mechanisms within the EU. Member states failed to decide on the price ceiling at the EU summit last week. The discussion was postponed until Monday, December 19th, due to the demand of some countries to lower it to 200 euros per megawatt-hour and debate about the list of importing countries to which it will not be applied.

However, Atlantic Council experts admit that in any case, this mechanism does not solve the problem in the long run. The supply crisis can be overcome only by increasing global production, to replace the lost Russian gas. Therefore, the EU should draw up a list of countries from where additional volumes of gas can be obtained and determine what measures should be taken to increase production and supply. 

Norway would be at the top of this list, having surpassed Russia in pipeline gas supplies to the EU this year (from January to September 2022, they amounted to 84 billion cubic meters — 6 billion more than last year). Yet, with the price ceiling imposed, it will not be possible to increase supplies, on the contrary — they will decline. Therefore, Norway should be excluded from the "ceiling" agreement. 

The United States has become the second-largest supplier of gas to the EU this year. Only in the first half of 2022, the volume of American exports to Europe increased to 39 billion cubic meters. To further increase the United States imports, it is necessary to expand the capacity of the U.S. East Coast and convince Washington to facilitate and streamline the permitting process for the construction of new LNG projects. In addition, Europe and America should work out a procedure to enter into long-term contracts that could reduce the risks for investors in the United States.

Finally, Qatar, which has substantial natural gas reserves, has the potential to replace Russian gas to a large extent. However, increased production would require guarantees from Europe; Qatari gas is expensive and long-term contracts carry risks for the EU. Because of this, the Germans were unable to reach an agreement with Qatar to increase LNG supplies in the first half of 2022. The Atlantic Council believes that if negotiations are conducted on behalf of the EU, it would be possible to negotiate better terms.

Generally, the Atlantic Council report demonstrates that the problem of replacing Russian gas in the long term at prices that would keep the European economy competitive does not yet appear to be solved. This means that talks about the prospects for Russian gas to return after the war ends will appear again and again on the discussion agenda.