How Europe weighs the geopolitical risks of its energy supplies
Russia’s invasion of Ukraine has forced the EU to drastically rethink its energy supply and wean itself off Russian fossil fuels. But the EU’s diversification efforts don’t come without new risks.
Russia was traditionally the EU’s key supplier of fossil fuels, with major infrastructure, such as gas and oil pipelines, further tying it into energy from the east. In 2021, Russian exports covered 40% of the EU’s fossil gas, 30% of the EU’s crude oil, and 30% of the EU’s hard coal demand, according to Eurostat.
However, confronted with the reality of fossil payments likely fuelling Russia’s war machine, the bloc ramped up its sanctions and sought alternative ways to meet Europe’s energy needs.
“Through our collective efforts, and in solidarity with Ukraine, we have ended our coal imports from Russia, eliminated 90% of Russian oil imports, and pipeline gas deliveries have fallen significantly,” said Energy Commissioner Kadri Simson, summing up efforts made last year in emailed comments to several media.
An energy divorce
Throughout the first months of the war in Ukraine, one question dominated EU energy industries and member states alike: Will Vladimir Putin turn the gas tap off?
Although Russia had a record of restricting gas flows to Europe as part of past disputes with Ukraine over the years – 2005-06, 2009 and 2017 – many assumed that, because the Kremlin kept supplies flowing throughout the Cold War, it would not resort to cutting off its largest market.
After all, less gas sold in Europe also meant less money for the Kremlin’s war chest.
But Russia seized the occasion to weaponise gas flows, first against Warsaw and Sofia, sending a clear signal to other EU countries.
Kremlin-controlled energy firm Gazprom also began to shut off gas supplies through the Nord Stream 1 pipeline to Germany.
While other European countries were still grappling with the challenge of reducing Russia’s lucrative fossil fuel supplies, Lithuania became the first European country to stop all imports of “toxic” Russian gas.
“It was a huge political victory, but also an economic win – it was like we won our independence for the second time because never again would we feel energy blackmail again,” one Lithuanian diplomat recalled for EURACTIV.
“Without a question, if many of our fellow European neighbours would have done this before the war, especially Germany, response to Russia’s invasion of Ukraine would have been quicker and bolder,” they added.
Nevertheless, by cutting off gas supplies throughout last year, Moscow forced Europe’s hand and made it lower its dependence. By the end of the year, Russian gas had dropped from forming half of Europe’s imports to under 10%.
Meanwhile, imports of coal and other solid fossil fuels were prohibited in August, with a ban on crude oil and refined petroleum products following – with limited exceptions – coming into force in December and February 2023 respectively.
But despite EU leaders agreeing on an embargo on seaborne Russian oil, any outright ban on gas supplies appears unlikely given how much certain members rely on it.
LNG saves the day
With less energy coming from Russia, the EU needed to make up the gap. This was partly done by increasing fossil gas supplies from foreign partners, maintaining flows through pipelines from Norway and Algeria to the EU at high volumes and marginally increasing flows from Azerbaijan.
Most importantly, the EU secured record volumes of liquefied natural gas (LNG) imports, which increased by 66% from 2021. The US supplied Europe with 42% of its LNG supply last year and is expected to cement its position as a steady source of fuel to Germany and other EU member states.
“By working with reliable partners, we have been able to swiftly replace most of our imports of Russian coal, oil and gas. This is hurting the Russian economy and helping Ukraine in its valiant war efforts,” Simson said.
The bloc also reduced the amount of gas it required via demand reduction and renewable energy production.
“Our citizens and industries have reduced their gas demand by 20% and we have found alternative supplies from international partners and through investing in new domestic renewables,” Simson said.
Energy battle won, but fight not over, says EU energy chief
The EU has successfully made it through the winter despite Russia’s attempts to disrupt its gas supplies, but there is still a lot of work needed to protect future energy security, said EU energy commissioner Kadri Simson on Monday (27 February).
What about Russian gas?
Despite all efforts, Europe has not freed itself completely from Russian energy and is still sending money to the country in exchange for supplies. In total, the EU has paid just shy of €140 billion in return for Russian fossil fuels since the start of the war.
Imports of Russian LNG also increased last year, although only marginally.
“If you look at the comparison between 2021 and 2022, it increased by about six billion cubic metres, which is, we’d say, nothing compared to the loss that we had in terms of pipeline gas from Russia,” an EU official told EURACTIV.
Russian LNG will also be excluded from the supplies jointly purchased by EU countries to help secure European energy security, the official added.
While at present it appears politically and morally unfeasible for the EU to ramp up its imports of Russian supplies, it remains a possibility in the long term.
Russian coal and crude oil would be difficult to return to since they fall under EU sanctions or are being otherwise phased out. However, fossil gas currently remains outside the EU’s punitive measures, and despite efforts by Russian hawks Poland and the Baltics, is unlikely to make the sanctions list very soon.
“The contracts haven’t been ended, so technically, there’s a big question and a challenge if Russia decides it wants to send more gas, whether companies will legally have to take it. It’s likely someone will have to step in,” Ben McWilliams, energy and climate consultant at thinktank Bruegel told EURACTIV.
Compared to other energy sources, Russian gas is difficult to send to alternative buyers, due to both the political unpalatability of working with Moscow and sanctions curtailing the possibility of building new LNG storage capacity.
“One thing Russia will really lose out on is technology. Before the war, they were working on new LNG export capacities in the Arctic, but the European energy majors pulled out and there are sanctions on energy technology exports,” McWilliams said.
The ideal would be for Europe never to need Russian fossil fuel supplies again, Lisa Fischer, programme leader at climate think tank E3G, told EURACTIV. According to energy experts, the bloc could replace two-thirds of Russian gas by 2025 by turbocharging renewables and energy efficiency and fully replace it quickly after 2025.
Alongside this, Fischer said that the EU should ensure any money sent abroad for gas supplies is “absolutely necessary and unavoidable” or it is a wasted investment in making domestic industries more efficient and competitive, insulating homes and boosting renewables.
The EU is already pushing the rollout of more renewables in order to increase its domestic energy production, reduce greenhouse gas emissions and combat high prices. In the long run, this increase should boost its security by making it less reliant on other countries for energy.
“Renewables are the best option to boost our energy security. In 2023, we must focus on getting as much new capacity online as possible,” Simson said.
“2022 was also a record year for renewable energy in the EU. We have added almost 50 gigawatts of new capacity, mostly from wind and solar,” she added.
China’s creeping influence
On the other hand, China has stood to gain massively from the energy sanctions, with Moscow supplying around 22 billion cubic metres of gas to the country, delivering 53 million tons of coal and increasing the electricity supply by 33% between January and October last year.
The increase of energy supplies to its neighbour came as part of Russia’s wider ‘pivot to Asia’ strategy to mitigate the economic impact of Western sanctions.
China also poses geopolitical risks for Europe in the acquisition and sale of LNG contracts.
He added that this trend will continue in the coming years, with the country having bought up much of the planned capacity.
“You might move into a world where China is controlling the swing aspect of this market,” he added.
In addition, the strict COVID-19 lockdowns in China over the past year meant there was less demand for gas, leaving more global supply up for grabs from Europe – a situation that is likely to change this year as the country shakes off the pandemic.
Alongside gas supplies, Beijing has a stake in the oil market and exports refined products, like diesel and petrol. The Chinese government sets export quotas on this, so has the ability to unilaterally limit supply.
Beyond fossil fuels, Europe is also heavily reliant on China for solar panels and critical raw materials, something the bloc is likely to address in its upcoming legislative package in March that will look at building EU competitiveness and addressing international supply chains.
“We need to see how the demand in Asia and the weather will evolve,” a second EU official said, adding: “Still, we believe that, in terms of attracting LNG, the EU will remain an attractive market.”
Beware new dependencies
As the EU looks for replacements for its energy supply, it needs to avoid falling out of one dependency and into another.
“There’s obviously the risk of creating new dependencies, be it on what is perceived to be friendly countries, like Norway and the US, but also countries that have authoritarian regimes or poor human right track records, like Azerbaijan, Qatar and so we risked obviously strengthening those regimes,” Fischer said.
And it is not just geopolitical risks that should be mitigated by diversification.
In this respect, LNG would be a viable option as it is based on an international market with several suppliers, McWilliams added.
However, Europe is buying on short-term markets, meaning it is facing more volatility and risk.
Signing long-term contracts would also be difficult as much of the future supply is already bought up and would be difficult to align with Europe’s climate goals, which require a drastic reduction in gas use, he warned.