Europe is facing a major energy shake-up as a departure from Russian fossil fuels and climate ambitions collide creating an unprecedented storm whose final results nobody can predict.
We are in a transitional period and that is becoming obvious to everyone. Roaring twenties are so far dreadful or Hitchckok-like twenties. It began with the unprecedented global pandemic, which led to economic uncertainty on a scale last seen after World War II. Then world, especially Europe, experienced and still is experiencing, actual war and all of its horrors and turbulence.
It’s no secret, that to run an economy, especially a developed one, you need fuel. To produce, transport, and provide electricity. In part, Europe owes its recovery and prosperity after it’s been ruined during World War II to Russia. As a continent with marginal own natural resources, especially energy commodities, to maintain economic growth in the post-industrial era, it had to bound itself with a stable, reliable, bulletproof partner who could provide fuel for those large economies.
Of course, if we dive into details, we can point out oil-and-gas-rich Norway, the Netherlands gas field near Groningen, or significant coal regions in Poland, Germany, or the Czech Republic. The last fuel though is consequently rejected and phased out by the European Union and Norway is sort of on the sidelines as it’s not even a member of the EU.
Nonetheless, 83% of the gas that was consumed in 2021 in the EU, comes from outside. Furthermore, 43% of that imports originated in Russia, that is 155 billion cubic meters. 29% of oil imports also came from the east. Combined, the EU paid Russian companies for energy commodities 99 billion euros in 2021. It’s more than the GDP of many EU countries. It’s also almost twice the sum that Kremlin spent on the military last year.
Why is that? Well, one could write a series of books about the process that led Europe to this dependence. But we can squeeze it into a few words – Russia is close, has large oil, gas, and coal reserves, and since the 60s has been consistently building a very dense network of pipelines connecting its hydrocarbons fields with continental Europe. Those connections lived through the fall of the Soviet Union and after the twists and turns of the 90s. In that period, many state-owned infrastructure and fields themselves have been privatized and parceled throughout a number of companies. In the Putin era, we saw the consolidation of fragmentized industry and the comeback of a state as a major shareholder.
An important point here – great political shifts, new eras, privatization, or nationalization, don’t affect the Russian fossil fuel industry in a significant way. There’s even more. Gas pipelines were chosen as a tool to sustain Moscow’s influence in Europe after the Soviet Union collapsed. Often times it was hard to distinguish where Russian state administration ends and where Gazprom structures begin. There is absolutely no doubt that this giant company, one of the biggest in its sector in the world is entwined with the state and executes the will of the Kremlin.
Europe is heavily dependent on Russian gas. But… it’s better than in the past, sort of. In 1990 Russia was responsible for 75% of gas imports to the EU and this number declined to around 40% in 2008 and remained close to this level until 2021. On the other hand, the share of Russian gas in EU primary energy consumption stayed at the same level since 1990 – 6,5%. Since then overall gas imports by the EU more than doubled which effectively means that in absolute numbers, gas imports from Russia increased reaching around 155 bcm in 2021. To be fair, we have to mention that Europe diversified supplies creating connections with Norway, Algeria, Nigeria, and the Middle East, whether with pipelines or LNG terminals.
Our continent is entangled in pipelines from the east. From Nord Streams in the north on the den of Baltic Sea, Yamal, that goes through Belarus, Poland, and Germany, Brotherhood in Ukraine to Turkstream in Turkey and southern Europe. All those pipelines have a combined capacity a few times larger than Europe’s gas imports from Russia. So why Kremlin needed even built additional ones, especially Nord Stream 2 and Turkstream? Of course, it was motivated politically. There’s no point in constructing an undersea pipeline like Nord Stream because it’s twice as expensive as a land pipeline. Russia could build an additional pipeline to e.g. Yamal, the infrastructure is in place.
Nord Streams were all about bypassing Central Eastern Europe and supplying large amounts of gas (both NS can deliver 110 bcm annually) directly to Germany and further to Western Europe. Germany could somewhat justify the need for an additional gas supply that is being now covered by Nord Stream 1. Of course, there is no justification for the route, but there is for gas supply. Nord Stream 2 is a different case. Germany does not need this pipeline to cover its demand. It supposes to serve the purpose of redistribution of fuel across Western Europe and making Germany the energy powerhouse of Europe. Now, it seems like this plan is dead as well as Nord Stream 2.
What’s next then?
Tectonic shocks prompted by the Russian invasion and atrocities in Ukraine will have an enormous impact on the global economy and especially on the energy sector since it is the main export of Russia. It seems that European Union reached a consensus at least over a direction – ending imports of fossil fuels from Russia. It is an important, courageous step and wasn’t so obvious even after February 24th. Ending trade relations with a thug attacking neighboring countries is a civilizational choice and in the future, it will be beneficial at all levels.
Can Russia redirect oil, gas, and coal deliveries to Asia? Perhaps only in some part. First, the infrastructure was designed for Europe deliveries, second, China and India, because those may be major new importers that already have other supplies. On the other hand, Europe has to use the maximum capacity of its LNG terminals, build new ones (especially Germany, they’ve already announced it), and invest in new gas pipelines, because without them we won’t escape Russian gas in a predictable future.