Ukraine crisis: Europe's dependence on Russian energy

As tensions between Ukraine and Russia escalated, the West decided to impose sanctions on Russia and its leaders, a move which could prove a costly affair, in turn, for it since several countries, especially in Europe, depend on Russia's gas exports for energy. Countries that sell their products to Russia will see trade revenues fall.

European Central Bank head Christine Lagarde said the main impact of the war in Ukraine was likely to come through higher energy prices and the uncertainty that will hit business confidence and consumption.

Impact on energy markets globally

Natural gas kept flowing normally Friday through the major pipelines from Russia to Europe. But the invasion and accompanying sanctions are casting a shadow over longstanding energy ties, both for the coming weeks and longer term.

Read | Ukraine has 'derailed' Russian attack plan: Zelenskyy

Europe, along with the rest of the world, is already facing high gas prices and an energy crunch that has hit consumers in their pocketbooks. Russia's attack on Ukraine has whipsawed energy markets, not least because Europe depends on Russian supplies of natural gas.

How Europe will be affected if Russia curbs gas exports

Europe relies on Russia for around 40 per cent of its natural gas. Most comes through pipelines including Yamal-Europe, which crosses Belarus and Poland to Germany, and Nord Stream 1, which goes directly to Germany.

By last year Ukraine was a transit corridor largely for gas going into Slovakia, from where it continued to Austria and Italy.

Russia has said it will continue to deliver uninterrupted natural gas supplies to world markets.

Although EU or US sanctions on Russian gas imports are seen as unlikely, damage to pipelines or Russia stopping gas transit through Ukraine could happen, analysts said, and fully replacing Russian gas to the EU would not be achievable in the short term.

What can Europe do?

Europe will need to secure large quantities of gas if it wants to avoid soaring prices and crippling energy bills next winter in the event of disruption to flows from Russia.

Already high wholesale gas and power prices spiked the past week when Germany halted certification for the Nord Stream 2 pipeline, which bypasses Ukraine to transport gas from Russia to Europe, and on Moscow's military move against Kyiv.

Supplies of liquefied natural gas brought by ship from the US has helped relieve some of Europe's gas shortage this winter, but it's expensive and export terminals are running at capacity.

In response to the invasion, the German government has frozen the approval process for the already-completed Nord Stream 2 pipeline that would bring gas direct from Russia under the Baltic Sea. Russia's state-owned Gazprom could still use other pipelines through Poland and Ukraine, so Nord Stream 2 is not needed for additional supply but to keep gas affordable and avoid interruptions like the pricing disputes.

Read | Ukraine crisis: Jittery neighbours rush for fuel, cash

Europe's shortage of gas reserves this winter came about in part because Gazprom held off from selling gas on the spot market beyond its obligations in long-term contracts. That led to concerns that Russia was willing to use gas as leverage.

Yet finding new energy supplies will take years. Europe continues to need natural gas to fire its electricity plants until renewables are built up to provide enough energy and to make up for falling domestic production. Analysts at Energy Intelligence say tight supply will likely keep prices high through the mid-2020s.

The long-term answer is to double down on developing renewable sources of energy to fight climate change, said Claudia Kemfert, energy expert at the German Institute for Economic Research in Berlin.

What this means for consumers

The conflict is adding to the surging energy prices already plaguing Europe and the US, crimping consumer spending and holding back economic growth. If oil prices rise to $120 per barrel and gas prices remain elevated, inflation would rise by a full percentage point and slow economic growth this year, analysts at Berenberg bank say.

Read | 'Russia no longer needs diplomatic ties with West'

European governments have rolled out cash subsidies for consumers hit by higher utility bills. Some heavy users of gas have shuttered or throttled back production, such as producers of fertilizer, which has become more expensive in turn.

Farmers have seen higher costs to fuel their equipment and those costs will turn up in food prices as well. Some people who switched to discount providers — who rely on energy from wholesale markets — have been sticker-shocked with sharply higher bills or had their contracts canceled when the supplier faced losses from high prices.

Is Russia the only gas supplier for Europe?

Not quite. Europe is the biggest customer for Russia's state-owned utility Gazprom, with 83 per cent of its sales in 2020. Gazprom has sought to diversify by selling to China.

But pipelines link much of its gas to Europe, and Russia has few liquefied gas terminals that would let it send gas anywhere. New connections to China are years away.

“Russia's capacity to divert gas flows to China is very limited now and by the time it grows, the EU will have other options," said Alicia Garcia Herrero, chief economist for the Asia Pacific region at Natixis bank.

Says Rystad Energy: “Russian gas exports bring in more than $300 million for the Kremlin each day — revenues they cannot afford to lose.”

That's why analysts have regarded a total gas cutoff by Europe or Russia as unlikely. The two sides need each other.

(Compiled using agency inputs)

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