21.02 Review

Gas Without You: The EU could completely stop using Russian gas this year, but is likely to postpone this decision for political reasons

The progress of another heating season in Europe demonstrates the sustainability of the new gas supply system, which emerged after Russia's invasion of Ukraine. Storage capacity is close to record levels. Prices for the year ahead are only 20% more expensive than the average for the ten years before the war. Russia now accounts for no more than 15% of European consumption. The EU has planned to completely phase out Russian fossil fuels by 2027. An immediate cancellation of Russian gas purchases would cut Russia's export revenues by almost $17bn, according to the Yermak-McFaull expert group. There are proponents of this idea among European officials. However, while discontinuing LNG purchases may occur relatively painlessly (though it will make Europe dependent on the US), pipeline deliveries may persist. Countries with strong right-wing and populist views are interested in continuing these, while, on the contrary, the idea of bearing costs to help Ukraine is not popular.

A month and a half before the end of the heating season in Northern Europe, the average level of gas storage capacity in the EU remains at the level of last year (67%), according to data from the Gas Infrastructure Europe (GIE) association, as reported by Reuters. The average for the past ten years is 49%. Winter in some European countries was colder than in 2023, but still warmer than usual. The largest consumers — Germany, Italy, France, the Netherlands, Spain, Belgium and Poland — are using less fuel. In 2023, their consumption level was 7% lower than in 2022 and 21% lower than in 2021. According to the International Energy Agency (IEA), 75% of the total demand reduction in 2023 was attributed to the energy sector.

In fact, Europe is facing a gas surplus. The high level of storage capacity has led to a relatively rare occurrence, noted by Reuters: contract prices for fuel delivery in March (the last month of the heating season) are lower than contract prices for delivery in April. This is usually the opposite. Low prices are intended to stimulate the clearing of excess reserves. The price of 1 megawatt-hour of gas with delivery in February (front-month futures) is now €28, compared to €47 in October, i.e. at the start of the heating season, and almost €60 in February 2023. Compared to the record level reached in August 2022, gas with delivery in the next month has become almost ten times cheaper. 

For large industrial companies that buy gas on the forward market rather than on the spot market, it is more expensive, but not significantly so: an average of €33 in 2024, compared to €52 in 2023 and €121 in 2022. Adjusted for inflation, prices for the year ahead are currently only 20% higher than the ten-year average preceding Russia's invasion of Ukraine, according to Reuters calculations. Meanwhile, spot and forward contract prices are expected to continue declining for some time, predicts the agency. This situation opens up prospects for the European economy, which was heavily impacted by last year's energy standoff, to somewhat improve its position.

At the same time, the current gas surplus creates more favourable conditions for the implementation of the plan proposed by the Yermak-McFaul expert group on sanctions, which suggests abandoning purchases of both Russian pipeline and liquefied natural gas as early as 2024 (→ Re: Russia: Minus $50 billion). The implementation of the plan would deprive Russia of almost $17bn in export revenues (about 7% of Russia's total exports in 2023), according to experts.

According to the IEA, by the end of 2023, Europe's gas supply structure was as follows: liquefied natural gas (LNG) from different countries — 37%; pipeline natural gas (PNG) from Norway — 24%; from other domestic producers — 16%; PNG from Russia — 10%; PNG from North Africa — 7%; PNG from other regions — 6%. Approximately half of the supply of liquefied gas is provided by the United States, with Russia accounting for about 15%. Thus, Russia's share in the European market, even considering LNG, has fallen below 15%. Before the war it exceeded 40%. In the spring of 2022, the EU announced that it intends to completely abandon purchases of Russian fossil fuels by 2027. This includes Russian LNG. So far, no sanctions have been imposed against it, and its supplies have grown by 40% since the war began, according to estimates from Global Witness. As a result, the EU is the largest importer of Russian LNG, with China in second place by a significant margin.

EU gas supplies, 2023, %

The year 2027 was not chosen randomly in European plans. By that time, new large volumes of LNG from the United States and Qatar are expected to enter the global market. According to Shell's estimates, the introduction of new capacities in these countries could increase the global LNG market volume by 17%, or 40 million tons. However, throughout this period, Russian supplies to the EU will remain one of the sources of financing the war in Ukraine, while the cost of assisting Ukraine in confronting Russia will also be a financial burden on Europe. 

In late December, the European Parliament and the Council of Europe announced that they would allow EU members to terminate agreements with Russian LNG suppliers unilaterally (Novatek is the main supplier and Gazprom to a lesser extent). Spanish Energy Minister Teresa Ribeiro (the country is the largest importer of Russian LNG in the EU) called maintaining relations with Russian suppliers 'absurd'. European Commissioner for Energy, Kadri Simson, is also calling for an early cessation of purchases. 

If Russia redirects its LNG to Asia, for example, to China and India, after terminating contracts with European consumers, as previously happened with oil, Europe is not expected to face a sharp rise in prices, the Bruegel think tank predicts. Even if the embargo were imposed during the current heating season, it would not lead to catastrophic consequences: the average storage level would be about 20% full. At the same time, by refusing to cooperate with Russia, Europe would make itself too dependent on the United States, warns Ira Joseph, a researcher at Columbia University's Centre for Global Energy Policy, in an interview with Bloomberg

Abruptly rejecting pipeline gas would not be easy due to internal conflicts within the EU. Recently, Kadri Simson once again stated that the EU is not interested in extending the trilateral agreement on the transit of Russian gas to Europe through Ukraine, as countries that continue to buy it could easily refuse. However, she specified that so far she has only 'preliminary estimates' at her disposal. Countries like Austria, Italy, Hungary, and Slovakia would be affected in this case. All these countries except Slovakia have real opportunities to substitute Russian gas, according to analyst Sergei Vakulenko, either by organising physical reverse flows from Austria or by receiving LNG from German terminals.

At the same time, this group of countries is still extremely problematic from the point of view of European unity — the positions of right-wingers and populists are strong there, and the idea of bearing costs in connection with the confrontation with Russia in Ukraine lacks support. This makes it less likely that European politicians will decide to implement the Yermak-McFaul plan before the upcoming European Parliament elections in the summer. Rather, a new round of active discussion of the plan should be expected after the elections, especially if expectations of increased supplies from 2027 continue to exert downward pressure on prices.