Russia’s invasion of Ukraine has sent oil and gas prices through the roof and put pressure on European policymakers to draw up plans to reduce their countries’ dependence on Russian energy, although they face limited options to do so.
The biggest conflict since the second world war has raised serious concerns over the future of Europe’s energy security due to its reliance on imports of Russian gas. Europe imports 37.5% of its natural gas from Russia, according to BP’s Statistical Review of World Energy 2021.
‘Crucial for our security’
“The events of the past few days and weeks have shown us that a responsible, forward-looking energy policy is not only crucial for our economy and our climate, but also crucial for our security,” Olaf Scholz, chancellor of Germany, said on February 27.
As it stands, Germany is 50% reliant on Russian gas, according to Eurostata figures. It is the biggest single consumer of Russian natural gas, using more than a third of Europe’s total, BP figures show.
Mr Scholz announced plans to build two liquified natural gas (LNG) terminals in Brunsbüttel and in Wilhelmshaven on the North Sea, and increase the country’s natural gas reserves in response to the risks incurred by the invasion. He also put the $11bn Nord Stream 2 project on hold on February 22 after Russia recognised the eastern regions of Ukraine Donetsk and Luhansk as independent states.
Italian prime minister Mario Draghi also signalled on February 25 that Italy is considering reopening coal-fired power plants to reduce its reliance on Russian gas.
EU energy ministers met on Monday to discuss support for Ukraine and to address the bloc’s security of supply as a result of the invasion.
But Tom Marzec-Mansell, head of gas analytics at the data logistics firm ICIS, says that “options for replacing Russian pipe gas quickly are very limited” with a tight global LNG market. “Building new LNG terminals cannot be done overnight, so will be of no help to keeping Europe well-supplied this year,” he adds.
“Higher reserves could improve security of supply for the winter, but will come at a cost,” he says, adding that it is “certainly possible more market interventions will be announced, such as tighter storage regulations by national governments in the coming weeks”.
Algeria’s state energy company said on Sunday that it is prepared to supply Europe with LNG in case of a possible shortfall. Before the invasion, Qatar said it would be impossible to step in to replace Russian gas supplies with its own LNG in the event of a disruption.
Meanwhile, both oil and gas, which were already trading at high levels, climbed much higher. The price of Brent crude hit $100 per barrel per day (bpd) on February 23 for the first time since 2014; despite a brief drop, the price has remained at or around that level since. European gas prices ended some 60% higher at the end of Thursday 24 February, as compared to the previous week, trading at €116.50/MWh, according to the ICIS TTF benchmark.
Europe’s dependence on Russia is “a fact of life,” says Lucia van Geuns, strategic energy advisor at The Hague Centre for Strategic Studies.
“In the short and mid-term, we have to deal with it.”