Why only a unified front will help Europe's move from winter crisis to green utopia

Continent's import dependence on gas increased to 63% in 2019, from 44% in 2001

A road sign directs traffic towards the Nord Stream 2 gas line landfall plant entrance in Lubmin, Germany. Reuters
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“Utter nonsense and politically-motivated blather”, was Russian President Vladimir Putin's response to criticism that his country is using gas supplies as a political tool. Yet, Russia’s envoy to the EU, Vladimir Chizhov, told the bloc “Change adversary to partner and things get resolved easier”.

Record high gas prices and fears of winter shortages show how Europe has become complacent about energy security, creating policy contradictions.

The immediate situation is not primarily driven by “green” policies. The UK’s measures to phase out coal and the rising price of EU carbon emission permits are contributory. But the immediate crisis comes from the collision of declining indigenous gas output and a German nuclear phase-out with robust rebound from the coronavirus shutdowns.

This will become worse before improving. Energy efficiency, the replacement of gas boilers by electrical heat pumps and the use of “green” hydrogen chip away at gas demand only slowly.

Along with Germany, Belgium and Switzerland are also closing their nuclear reactors. In the short run, these will be replaced with gas power, which will be preferred more than renewables. The UK has, by contrast, strongly backed nuclear but all its existing reactors will close by 2035 and two new ones are only due for completion respectively by the end of 2026 and the early 2030s.

Europe has abandoned any credible threat of increasing domestic production to deter Russia. Shale gas development is off the menu and output from the Netherlands and the UK is in steep decline, with no prospect of reversal.

Natural gas makes up a slightly smaller share of primary energy use in Japan than in Europe. Japan imports virtually all its gas while Europe’s import dependence in 2001 was only 44 per cent. That rose quickly to 63 per cent in 2019, even though consumption dropped slightly.

Europe, in short, is becoming more like Japan – which, with the historical legacies of the US oil blockade during the Second World War and the 1970s oil crises, has been understandably paranoid about its energy security.

Mr Putin criticised “smart alecs” in Brussels for pushing for market-based gas pricing instead of traditional long-term contracts linked to oil prices. His comments are self-serving. Analysis by the International Energy Agency shows that market liberalisation has saved Europeans $70 billion of import bills between 2010 and now; only this year has it cost money.

Long-term oil-indexed gas purchase contracts are now completely unsuitable for a world where decarbonisation makes future demand highly uncertain.

There are at least three non-exclusive interpretations of the insufficiency of Russian gas. First, simply that state pipeline monopoly Gazprom does not have the production and/or transport capacity to supply more. Second, that it has held back supplies to put pressure on Europe to approve the Nord Stream II pipeline quickly. And third, that it is leveraging the gas shock to reward Russian-aligned governments such as Hungary’s, as well as roll back the EU’s liberalised energy market and decarbonisation plans.

On Wednesday, Mr Putin ordered Gazprom to fill its European storage and prices tumbled. But whatever the reasons for its behaviour, Moscow’s messaging is mixed. It is hardly surprising that its European customers worry about its reliability.

The continent’s medium-term options are limited. Unlike Russia’s existing gas exports to China, which go from east Siberia, the proposed Altai pipeline would link to west Siberian fields and, therefore, allow Gazprom to divert gas from Europe.

The Trans-Adriatic pipeline from Azerbaijan via Georgia and Turkey started operations last November but even when it is expanded, it will meet less than 4 per cent of the continent’s needs. New gas could enter the Balkans from Turkish Black Sea finds or via Turkey from Iraq’s Kurdistan. But it is unlikely that any more major gas pipelines to the continent will be approved or financed.

Even among existing suppliers, the Algerian pipeline via Morocco to Spain has been shut down in a diplomatic dispute while Algeria’s exports overall are set for long-term decline.

Europe has abundant liquefied natural gas import terminals. LNG export terminals generally run as close to maximum capacity as they can, so they are not suited to meeting winter demand surges.

LNG also hinges on sufficient global supply, which is quite squeezed this year due to a dearth of recent new investment and to technical problems at some plants. Major growth this decade is expected to come from four sources.

The first three are Russia, which does not help diversify supply; East Africa, which faces challenges of insurgency, investor terms and the reluctance of western banks to lend to fossil fuel projects; and Qatar, which is executing a major expansion from 2026 that will probably be focused mostly on Asia.

That leaves the US, with 11.3 billion cubic feet per day (cfd) of existing liquefied natural gas export capacity. In-construction, approved and pending projects could add up to 41.1 billion cfd, more than the entire current LNG market worldwide.

Yet, producing enough reasonably priced gas to feed these plants is not without challenges. Shareholders, scarred by years of losses, are reluctant to invest in raising output. The industry faces ever-growing restrictions from environmental activists, financiers and government. If domestic prices rise very high, industries such as chemical companies might successfully lobby for export restrictions.

Finally, US supplies follow the highest bidder – and for now, China is the preferred destination despite chilly political relations.

In the long run, Russia’s tactics will only speed up Europe’s determination to wean itself from gas. However, the continent needs a plan for the middle section of the journey – from winter crisis to green utopia. That requires supporting vulnerable consumers and countries, particularly in eastern Europe, and redoubling market liberalisation and anti-monopoly and diversification policies. Germany and others should, but probably will not, seriously rethink their anti-nuclear stance, at least for existing reactors.

Low-carbon supply and storage that is not dependent on weather – batteries, hydrogen, geothermal, carbon capture, long-range electricity connections – must quickly be brought into a robust energy system, but in a thoughtful manner.

Most of all, Europeans need to speak with one voice and realise that energy security, geopolitics and environment are entwined.

Robin Mills is chief executive of Qamar Energy and author of The Myth of the Oil Crisis

Updated: November 01, 2021, 4:30 AM