IEEFA: Europe’s reliance on gas means Russia continues to rule the market

As Europe’s gas supply crisis stretches into its fifth month, a chorus of politicians and pundits is calling for the European Union to diversify its gas supplies to protect against future disruptions.

We’ve heard those calls for nearly two decades. Following the Russian-Ukrainian gas crisis in the 2000s, EU policymakers have passed a series of regulations designed to harden the country’s gas markets against shortages. Clearly, those rules have failed. And unless policymakers change direction, new rules will fail as well.

Put simply, the EU’s longstanding strategy focused on diversifying the routes by which gas is shipped to the continent, rather than diversifying the ultimate suppliers of that gas. That left the entire continent vulnerable to one fundamental threat: politically motivated manipulation by the continent’s main gas supplier, Russia.

The numbers on Europe’s dependence on Russia speak for themselves. In 2005, an estimated 38% of the EU’s gas imports came from Russia. By 2020, that total rose to nearly 44%—and liquefied natural gas shipments added a few percent more. For some EU countries, dependence on Russian gas is even higher: Germany, for example, relies on Russian gas for up to 75% of its imports.

EU rules aim to prevent the failure of any one piece of gas infrastructure—particularly a pipeline—from creating a catastrophic energy shortfall. These rules were a boon to European gas-infrastructure companies, which made lots of money building new pipelines, regardless of whether they were truly needed. But as today’s crisis shows, the EU’s myopic focus on infrastructure was counterproductive, and allowed Russia to emerge as the single point of failure for the entire continent’s gas system.

A growing consensus among energy analysts holds that Russia bears most of the blame for today’s EU gas shortages. Gazprom  OGZPY+0.85% , the state-owned firm with a monopoly on pipeline exports of gas, began to trim shipments to the EU last summer. In the fall, the company emptied the gas storage facilities it owns in Western Europe. Gas exports from Russia have remained low all winter. The result has been persistent shortages, sky-high prices for both gas and electricity, and a cash bonanza for Gazprom.

To all appearances, the Russian government, acting through Gazprom, manufactured the gas crisis as political leverage for the speedy approval of Gazprom’s new Nord Stream 2 gas pipeline, which runs under the Baltic Sea from Russia to northern Germany. Though completed in September, Nord Stream 2 ran afoul of EU laws prohibiting the same company from owning both a gas pipeline and the gas that flows through it. Until the EU gives Nord Stream 2 the green light, the $11 billion project will remain idle.

Russia now presents Nord Stream 2 as the solution to the EU’s gas supply woes, not the cause. Yet for security of gas supplies, Nord Stream 2 is beside the point. A new piece of gas infrastructure can’t solve the underlying problem of overdependence on Russia. If anything, Nord Stream 2 makes this problem worse, not better.

It’s not that the EU is consuming more gas. Quite the opposite: EU consumption peaked in 2010. Yet at the same time the continent’s own gas output has dwindled. Some gas companies tried to boost European output, with little success. Experiments in fracking, which has lifted U.S. supplies, have mostly failed in Europe.

Moving forward, Europe’s energy conversation must move beyond mere diversification of gas supplies. It should focus on diversification of all energy sources, with increased focus on the sources, such as the sun and wind, that don’t rely on outside suppliers and that are completely immune from politics. To view entire article, click here.

This commentary appeared in Barron’s [$] on February 14, 2022: As Long as Europe Depends on Gas, It Will Need Russia

About the authors: Clark Williams-Derry and Ana Maria Jaller-Makarewicz are analysts with the Institute for Energy Economics and Financial Analysis.

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