The Energy Crisis in Europe and Russian Gas Supplies

Abstract

The increasing tensions within global gas markets, especially in Europe where gas makes up a considerable share of the energy balance, are considered. The nature and reasons behind supply and demand imbalances in the European gas market are analyzed. The risk factors that have caused the unsatisfactory situation in the field of energy, including strong volatility, stock levels, imbalances in supply, and political unpredictability, are examined. The analysis of factors impacting the energy crisis has revealed that the situation is largely dependent on the supranational policy of the EU, which is stimulating a surge in energy demand.

The situation in relations between Russia and the European Union in the energy sector has escalated since the beginning of the special military operation in Ukraine. Within a month from the onset of the operation, it became clear that this escalation was due to the pressure of a “third party” (to the greatest extent the United States and Great Britain), influencing decision-making, which plunged the European energy market into a situation of instability and unpredictability.

The wave of changes ahead with unclear results and increased tensions in global gas markets and especially in Europe mean the onset of a period of uncertainty regarding the implementation of national plans for the recovery of the European economy and ensuring sustainability (The Recovery and Resilience Facility) after the COVID-19 pandemic, as well as the green and digital transition programs for 2021–2027 [The Recovery and Resilience Facility, 2021].

Now that the energy conflict between Russia and the European Union has entered an active phase, there are calls to eliminate the dependence on Russian energy and thus ensure energy security for the European Union. In March 2022, the European Commission unveiled a strategy to eliminate the dependence of the regional bloc on Russian gas, which will reduce imports in physical terms already this year. The corresponding plans were recorded in a document issued on March 9, 2022, Repower EU [REPowerEu: European Commission’s…, 2022]. It notes that the European Union hopes to reduce demand for Russian gas by 2/3 already by the end of 2022 and be completely free from Russian supplies by 2030. It is assumed that this goal can be achieved by increasing the importation of liquefied natural gas, the expanded use of renewable energy sources (RES), and energy saving measures, as well as by expanding the use of hydrogen and biogas. It is clear, however, that the implementation of all these measures significantly worsens the economic situation of the European Union. It increases energy prices to an even greater extent, and consequently, the costs of production and transportation of goods by European companies will increase and the real incomes of the population will decrease. At the same time, the rise in prices will cause an undesirable, from the point of view of the “green” agenda of the European Union, increase in coal consumption and an increase in environmental pollution. All this means that a certain reduction in energy supplies from Russia to Europe is possible, but Europe will not be able to replace Russia completely as one of the most important suppliers of the European Union. The reason is the growing imbalance between supply and demand for fossil fuels on the global market and the rise in prices for fuel in connection with this imbalance. The situation is so serious that it can be called a global energy crisis.

The rise in prices began in July 2021. By the end of that month, prices on one of the largest Dutch exchanges Title Transfer Facility (TTF) jumped to $500 for 1000 m³. The next jump in prices occurred after a fire on August 5 at the Urengoi plant of Gazprom Pererabotka, which led to a decrease in the pumping of Russian gas to Europe. By the end of August, market prices had set new highs at $600; on September 9 they rose to $700, and on September 14, to $800 per 1000 m³ [How gas prices in Europe formed and changed]. Record high prices for natural gas persisted during the last months of 2021. On December 21, gas prices in Europe increased by more than 25% on one day, breaking the $2000 per 1000 m³ mark for the first time in history and approached $2200. Subsequently, the price decreased, but still remained significantly higher than at the beginning of the year. Thus, the prices of futures for gas in Europe at the auction on February 10 fluctuated in the range of $885–$910 dollars per 1000 m³ [Gas rrices in Asia…, 2022].

THE NATURE OF THE CRISIS AND ITS CAUSES

In 2021, a number of factors emerged that determined the general trend in the global energy market: an increase in the price of oil, gas, electricity, and other energy sources. The catalyst was the gradual overcoming of the Covid economic crisis and the recovery of the global economy. Real GDP growth in 2021 was 8.1% year-on-year. As a result, energy demand soared and the year ended with record high natural gas prices in major import markets in Europe and Asia. The combination of rising demand and lower-than-expected supply led to a crisis in the market. The energy sector could not emerge from the crisis overnight. An additional marker of the energy crisis was the growing differentiation in terms of access of various categories of the population and countries (rich and poor) to raw materials. There were signs of tension between countries due to measures to protect supplies, and the threat of planned rolling blackouts hung over the average consumer. In the United Kingdom, due to a lack of energy, a number of enterprises had reduced production by the beginning of winter 2021 and had applied for state assistance, while electricity tariffs in France were the highest since 2012.

According to our assessment, the energy crisis, as a spasmodic phenomenon that occurs when the demand for energy carriers is much higher than their supply, was first manifested in Asia. Gas price in the Asia–Pacific region on September 30, 2021, in the form of the index S&P Global Platts JKM (gas price indicator in Asia) for November spot LNG supplies to the Asia–Pacific region rose by $2.82 per MMBtu (million British thermal units, Btu) compared to the previous day of trading and amounted to $34.47 dollars per MMBtu, or about $1231 per 1000 m³. This is the highest level of the indicator for wholesale shipments since the beginning of 2009. The previous record was reached on January 14. In a cold winter with fuel supply problems, it jumped to $32.5 per MMBtu, or about $1161 per cubic meter. Leading Asian consumers were forced to look for ways to obtain additional shipments of LNG, since its stocks in some countries turned out to be insignificant. LNG prices in the region were supported by rising gas prices at European hubs and intensive optimization of the supply portfolio by LNG producers [Gas prices in Asia…, 2022].

In Europe, gas prices began to rise in leaps and bounds from the second quarter of 2021. According to S. Komlev, from May 2020, quotes grew 30 times by the end of the year. Most likely, they will remain quite high in 2022, which may lead to a further slowdown in the growth of the natural gas market and GDP. The impact of the crisis waves is likely not only on the European side, but also on other established and developing markets for gas imports. At the same time, uncertainty remains high regarding the supply of this energy carrier and, consequently, gas prices.

All this information raises questions. Is the energy crisis in Europe a temporary phenomenon or a purely regional event, or is it part of the global crisis? Does it mean the presence of structural problems in the functioning of the energy market? Is it possible that the crisis will repeat in the future?

The European energy crisis, which is the other side of the problem of ensuring energy security, seems to be the result of a combination of circumstances, the simultaneous action of many risk factors. According to our estimates, there are at least two dozen main and additional causes of the energy crisis. In addition to the global economy’s revival, these may include development of “post-covid syndrome”; the extent of vaccination; rapid transition to renewable and “green” energy; weather and climatic conditions; reduction of investments in oil and gas production, coal, and nuclear power plants and other traditional energy sources with insufficient investment in alternative energy; increased demand for LNG in the Asia–Pacific region; limiting supply from major suppliers; delay in the Nord Stream 2 certification process; geopolitical decisions and political risks; growing logistical problems; dollar inflation associated with the conduct of a monetary policy of low interest rates and an increase in US public debt; rising cost of maritime transport; lack of coordination between energy suppliers and consumers; speculation on the problems of climate change and the desire to buy for future use; and state intervention and the war of sanctions.

THE MAIN RISK FACTOR

Among the primary reasons that caused the energy crisis in Europe in 2021, the low level of stocks in UGS is most often cited, but this is still more a consequence than a cause. According to Gas Infrastructure Europe (GIE), the operating capacity of the EU storage facilities was 1148 TWh (approximately 102 billion m³) as of July 2021. The third quarter of the year is traditionally the peak season for gas storage replenishment. However, on June 30, 2021, the filling rate in the European Union was already lower than on the same day in 2020 (47.4% vs. 80.3%). The average EU occupancy rate at the end of September 2021 (74.6%) was the lowest at this time in decades (historically ranging from 81 to 97%) [Quarterly report on European…, 2022, pp. 20–22].

The situation has become so aggravated that some European powers, especially rich ones, are faced with a dilemma: whether or not to resort to limiting sales of natural gas and electricity to other countries? In particular, France threatened to limit its supply to the UK Channel Islands amid disagreements over the definition of fishing zones for national companies [UK sends two …, 2021].

“Europe is the world’s largest balancing gas market and is able to absorb most shocks in the global gas market. But just as an old car needs periodic shock absorber replacement at service, so Europe needs large supplies to fill storage to absorb new shocks,” writes Mike Fulwood of the Oxford Institute for Energy Studies in his article. And further he continues, “Increasing supplies in practice will require an increase in the flow of gas from Russia through the Yamal—Europe gas pipeline, or through Nord Stream 2, after it is approved by the regulator” [Irresistible pipes …, 2022].

In general, in 2021, gas exports through Russian pipelines to Europe increased by 4% compared to the same period of the previous year, but still remained 4% below the level of 2019. This was entirely due to the expansion of supplies to Turkey (an increase of more than 60% compared to the same period in 2020). At the same time, deliveries through the Power of Siberia pipeline to China amounted to 10 bcm³; i.e., they more than doubled [Gas Market Report, 2021, p. 43]. Our country is also increasing LNG exports. In 2022, according to rough estimates, it will increase by 5% as a result of the full launch of the 4th stage of Yamal LNG and the commissioning of Port LNG [Gas Market Report, 2021, p. 43].

Foreign and Russian experts today do not consider serious alternatives to Russian gas. Moreover, Russia may become the only source of additional gas supplies to Europe in 2022. As follows from the IEA report for the fourth quarter of 2021, despite the risks of geopolitical aggravation and some already established trends in increasing LNG imports, Gazprom will increase supplies by about 2.5% compared to 2021. According to the latest IEA forecasts, Russian pipeline gas supplies to the European market could reach 170–180 billion cubic meters (IEA under the European market also means nonmember countries of the Balkans, as well as Turkey).

As noted above, in order to replenish gas reserves in European storage facilities by next winter, it will be necessary to pump significant volumes of gas, more than have ever been pumped in one summer season, which will have a significant impact on the price of gas on the market. This is a very serious challenge, taking into account, among other things, the daily limits of download volumes, which are limited by the technological capabilities of storage facilities.

Apparently, the current price level is high enough to ensure the restoration of stocks in the European gas market. Gas prices in the European Union will remain elevated this year as well and, contrary to the opinion of the IEA, may only decrease in the spring of 2023. It is realistic to assume that prices may turn out to be high even if Nord Stream 2 is commissioned [Chekletsov, 2022].

The current situation in the European gas market indicates, in particular, that the issue of introducing and updating their tools for ensuring energy security and optimizing the use of gas storage facilities is of particular relevance for the countries that consume blue fuel. By the beginning of March 2022, the EC has prepared a draft decision, according to which gas storage facilities in member countries will be required to maintain a filling level of 80%. The expert coordinating group on gas at the European Commission is called upon to monitor the situation on the market.

STATE OF UNCERTAINTY

The transition to new realities is associated with unexpected turns in energy policy. The “green” agenda raises a wave of changes with unclear results for Europe, which give rise to external and internal challenges and threats to the energy security of the region, and lead to a fairly long period of uncertainty and unpredictability.

Economic growth forecasts for 2022 remain positive. But the macroeconomic policy of the European Union is beginning to experience significant pressure from rising consumer inflation. This situation is often attributed to rising prices for key energy commodities, although by some estimates it is rather the beginning of a cycle of rising overall commodity prices against the backdrop of an unexpected decline in renewable energy sources. Undoubtedly, this issue requires further research. At the same time, the rise in natural gas prices is accompanied by an increase in coal consumption in Europe and Asia, seemingly causing a movement back from the goals of the “gree” transition.

The crisis that began in the second half of 2021, apparently, will not go anywhere anytime soon. With real shortages and geopolitical risks, gas prices may still reach new highs in the near future. For example, the cost of natural gas on the spot market in Europe has increased markedly. February 24, 2022, quotes accelerated growth, and March futures on the index TTF at auction rose sharply relative to the previous trading day. March 2 spot market quotes on the Dutch hub TTF set another historical record, soaring to $ 2227 per 1000 m³ gas [The war continues…, 2022].

Of course, in March the political factor of rising gas prices becomes dominant. And this is not the fault of Russia, which is ready to increase gas supplies, but the fault of European politicians who have taken a course, so far mostly in words, to reduce Russian gas imports. This causes a rush of speculative demand in the global energy market, which reduces its steadiness, stability, and predictability. According to Deputy Chief Director for the Energy Institute of Energy and Finance (IEF) A. Belogoryev, without the influence of military and sanctions factors, the quotes would be lower. At the same time, the main reasons for a new round of growth in gas prices were, first of all, the fears of Europeans related to the announced restrictions on the import of Russian hydrocarbons, announcements of “lock down,” an increase in oil prices (over $105) and depletion of reserves in UGS facilities [Expert names an objective …, 2022].

In particular, the head of the German Ministry of Energy (Director of the German Economy Committee) Robert Habek said that in connection with the Russian military operation in the Donbass, Germany would be forced to abandon Russian gas and coal [Germany commented on …, 2022]. At the same time, in Germany, against the backdrop of increased political risks and low levels of reserves in UGS facilities (somewhere around 30%), the volume of natural gas transit from Russia to Europe through the territory of Ukraine has increased since the start of the special military operation. A number of European experts who deal with the energy problem admit that our country may become almost the sole source of additional gas supplies to Europe in 2022 [Gas Market Report, 2021, p. 81].

At the same time, there are new signs of the European Union’s determination to stop importing Russian gas. It is usually noted, including experts from World Gas Intelligence (World Gas Survey), that energy independence takes time, and any sudden reduction in Russian supplies could overturn plans and cause chaos next winter. Obviously, gas supplies to Europe from Russia will not stop in the near future. Such a measure could cause more harm to Germany and the European Union as a whole than to Russia, since the share of the European Union in Russian gas exports is a very significant value, at about 40%, and for Germany it is even more, at 50–55% [Putin demands Europe …, 2022].

Against this background, the position of the Prime Minister of the Netherlands Mark Rutte appears natural, who, before the talks in Paris with French President Emmanuel Macron, openly stated that it was impossible to refuse Russian oil and gas supplies, without which it is impossible to advance the green agenda [Dutch PM: Not possible …, 2022].

RUSSIA’S POSITION

The official position of our government regarding the current energy crisis in the European gas market correctly and consistently conveys the idea that the gas shortage in the European market in 2021 was the result of the economic policy of the European Commission. In addition, it was rightly noted that 8 billion m³ of gas failed to be delivered from the United States and the Near East to Europe, which led to higher prices. Head of Gazprom A.M. Miller, for his part, attributed the rise in prices to insufficient gas reserves in European UGS facilities. At the same time, he emphasized that the company supplies gas to the European Union in full compliance with the contracts and, to the best of its ability, seeks to satisfy applications for additional supplies. The President of Russia V.V. Putin pointedly instructed Gazprom, after the completion of gas injection into Russian UGSFs, to begin work to increase supplies to European gas storage facilities located in Austria and Germany by November 8 [Putin tasks Gazprom …, 2021].

It is no coincidence that, despite the political tensions between Russia and the European Union, an important moment was the updated political discourse regarding the preference for long-term gas supply contracts over the practice of spot prices. The discussion also concerns the development of long-term measures to overcome the gas crisis. A special place was given to the launch of Nord Stream 2.

However, after February 24, the European Union, as noted above, launched a new energy strategy REPower EU. The goal was set to reduce gas imports from Russia by the end of 2022 by almost two-thirds and to make Europe independent of Russian hydrocarbons by 2030. Calculations are based on the fact that renewable energy sources can play a significant additional role in the energy independence of the European Union in the medium term. Such a scenario is supported by an appropriate action plan, financial and legal measures to create a new energy system, and the search for alternative energy sources (gas, oil, coal) [REPowerEU: A plan…, 2022].

Under the current conditions, the establishment of a dialogue with potential energy suppliers (be it Qatar, Iran, Egypt, the United States, Nigeria, Azerbaijan, Saudi Arabia, Venezuela, or others) should apparently be considered not in the context of independent separate relations, but within the framework of an updated anti-Russian energy strategy of the European Union [Fedda and Caramello Alvarez, 2022].

How effective can such a strategy be? Obviously, the reduction in the supply of Russian hydrocarbons will have a shock effect. Rising energy prices as a result can be unpredictable. The United States is the driving force behind this strategy. They, in fact, have not given up trying to force the Europeans to abandon the importation of Russian oil and gas. In an effort to tear Europe away from Russian energy, Washington is pushing the idea of the need to coordinate and create appropriate logistics based on the conclusion of the Transatlantic Pact in order to compensate Europe for the loss of gas, oil, and coal. Stopping Russian gas imports, Western experts say, will be difficult and costly. Stopping oil and coal imports may be less painful for the European Union [McWilliams and Sgaravatti, 2022].

An analysis of the current crisis in the gas market shows that, if earlier it was rather difficult to maintain a balance of interests between exporters and importers, today this task has become even more difficult for domestic companies. The latest measures taken by the Russian leadership to organize payments for natural gas and other energy supplies in rubles are of positive significance for our country. This makes it possible, to some extent, although not fully, to insure export earnings in Euros against possible blocking of proceeds on correspondent accounts of Russian credit institutions in foreign banks, as well as to pursue a currency policy in line with the dictates of the time.

At the same time, otherwise, the Russian government does not plan to change the main parameters of the Russian energy strategy, although such a possibility cannot be completely ruled out in the future. The Russian side is determined to continue to supply natural gas to Europe in accordance with the volumes and prices fixed in the contracts concluded earlier.

* * *

Today, with the rapid growth of the LNG market and the greater integration of trunk gas pipelines, European and Asian natural gas markets and prices are becoming more interconnected than ever before.

An analysis of the factors influencing the energy crisis in the European gas market convinces us of the importance of maintaining a dialogue to ensure energy security, since it can contribute to the achievement of both economic and environmental goals of the European Union. Specific tactical measures, such as the creation of strategic gas reserves, the conclusion of long-term contracts, and a timely, structured, and correct response to the imbalance of supply and demand in the market, with a focus on its sustainability, can reduce the severity of the European energy crisis and help minimize gas price volatility.

In the European Union, an opinion is increasingly gaining support that the EU policy of targeting energy security and the limiting of imports of hydrocarbons from Russia do not meet the conditions of an accelerated “green transition,” which largely depends on the exportation of raw materials and energy resources, and does little to reduce inflation pressure.

Russia’s strategic goal, in our opinion, should be to stabilize transactions in the European gas market and to maintain energy cooperation with the region, which has been developing over the past several decades.

The current energy crisis and the situation in connection with the special military operation are not reasons to abandon the European energy market. The loss of a part of the market will mean a leap back in the development of our energy supplies, when literally all chains, including logistics, may begin to crumble. In this undesirable case, whether we will have time to close the gap in energy supplies to Europe and try to transfer these energy flows to Asia in a short time is a big question.

Despite the current events, Russia and Europe continue, at the very least, energy cooperation, since their relationship is based on interdependence. Today it is extremely important for business, the expert community, academia, and related political groups to negotiate with the participation of those EU member states that impede the abandonment of Russian energy imports. At the same time, it is important to use various formats and directions, including multilateral platforms, including the United Nations, in order to maintain the stability of the energy market.

It is also necessary to continue discussions on international platforms on topical issues such as innovations in the energy sector and the expansion of the use of hydrogen and bioenergy in ensuring the sustainable development of the European economy through decarbonization based on the synergy of gas and electricity supply. The international community, judging by the speeches at the last IX session of the UN Economic Commission for Europe Expert Group on Gas, in which the author of this article participated (March 24–25, 2022, Geneva), is also interested in discussing the role of natural gas and nuclear energy in strategy for the decarbonization of Europe, with a study of the role of methane in climate change.

The necessary prerequisites for the implementation of the recommendations formulated above on resolving the problems of the gas market in Europe will be created by the successful completion of the special military operation.

CONFLICT OF INTEREST

The author declares that he has no conflicts of interest.