How can Europe cope without Russian gas?
Since Russia’s invasion of Ukraine on 24 February, energy security has risen to the top of the EU agenda. EU energy policy has long been built on three pillars: a competitive Single European Market, environmental sustainability, and energy security. Until 2022, security came last on the list. The EU has now reversed this, with considerable effect. In the autumn of 2021 Russia’s weaponizing gas trade caused shivers across European capitals. But one year later, even as the winter looms, Russia’s gas weapon seems much weaker and the EU is much more robust.
In her State of the European Union Speech, on 21 September, Ursula von der Leyen declared that the “current electricity market design […] is not doing justice to consumers anymore.”. With a few sentences, the President of the European Commission effectively declared that three decades of energy liberalization had come to a halt. This model, which had been sustained by plentiful supplies of cheap Russian gas, was simply no longer viable. By then the French and German governments had nationalized or bailed out energy companies and storage assets, and the EU had new rules on storage and joint gas purchase in place.
On 21 October the European Council agreed new plan to tackle the energy crisis, featuring a raft of initiatives that range from temporary gas price caps and limits to price volatility in derivatives markets to a new pricing benchmark for LNG (liquefied natural gas, transported by ship and traded globally), stronger rules on joint gas purchasing, and a solidarity mechanism for sharing gas in case of severe shortages. The markets reacted immediately, brining prices down. But are these temporary measures, or does this herald a shift toward a more state-driven model of EU energy policy?
Although energy is traded as a commodity, it is best understood as a strategic good: a public good with important national security implications. The Russo-Ukrainian gas crisis of January 2009 and the annexation of Crimea five years later drove this point home. The 2009 crisis prompted EU investment in interconnection and reverse-low pipelines. Poland and the Baltic states went further, investing in spare capacity to replace pipelines gas from Russia with LNG from international markets.
Yet, until recently, the European Commission and most EU states continued to treat gas primarily as an ordinary commodity (with one big externality: climate change). When Gazprom priced gas differently for more and less Russo-friendly EU states, the Commission used competition law to resolve this as a matter of a firm’s abuse of its dominant position. This was done for good reasons. The central idea since the fall of the Berlin Wall was to tie Russia to the EU though trade and mutual dependence. And it was cheap.
Although the danger that oil and gas trade might be weaponized was well understood, both political and industry leaders considered this very unlikely. Until recently Russia supplied 40% of the gas used in the EU: some 155 billion cubic meters yearly. Fossil fuel export earnings supplied 40% the Russian state budget; about a third of this came from gas.
Whereas oil is a fungible commodity, traded on global markets and transported by ship, the 140 billion cubic metres Russian gas that went to Europe via pipelines had nowhere else to go. China might be a big market for Russia in the future, but to get the infrastructure in place to hit even a third of the EU level will take several years. And in any case that involves gas from Eastern Siberia, a long way from the geopolitically stranded assets in Western Siberia. Russia could simply not afford a gas war.
The problem was that whereas the EU was vulnerable in the short term, Russia was vulnerable in the medium to long term. Consequently, even after Russia’s annexation of the Crimea in 2014, many EU state were reluctant to risk the economic, social and political costs that interrupted gas trade could involve. The fear of sky-high prices, inflation, and yellow-vest-type protests limited the scope for EU sanction.
This probably caused Vladimir Putin to believe that the EU would remain divided and incapable of action if Russia attacked Kiev. Moscow was clearly surprised by EU leaders’ willingness to bear the costs of a gas cut-off. When Chancellor Olaf Scholtz withdrew Germany’s approval of the new Nord Stream 2 pipeline on 22 February, Moscow had no response ready. With the stroke of a pen, the biggest importer of Russian gas showed that it was prepared to risk a gas supply crisis if that were what it took to stand up to Russian aggression.
Half a dozen sanction packages followed, as did haphazard Russian counter-measures designed to split EU states politically. Gas supply to “unfriendly” states were cut. EU states increased pipeline and LNG imports from other sources, improved LNG infrastructure, mandated storage, accelerated the development of renewable energy, and began to reduce energy consumption. Putin’s closest ally in the EU, Hungarian Prime Minister Viktor Orbán, was totally isolated. Even the Russophile Italian populist and far right parties had to distance themselves from Putin to win elections.
This has had three important effects. The first was to render the EU more robust in the face of a total Russian gas cut off. Russian gas is down to 9% of the EU market. The winter weather will be an important factor, but the EU can now cope without Russian gas.
Second, it weakened the Russian gas weapon. If it turns out that Russia was behind the attacks on the Nord Stream 1 and 2 pipelines on 26 September, this signals a major change of strategy. Until recently, the strategy seemed to be to occupy or annex Ukrainian territory, threaten gas cut-offs to force EU governments to accept this, and reward them with cheap gas if they did so. This policy tool is now gone.
The third impact is even more important. The EU’s initiatives signal a bigger shift in EU energy policy, toward more state-driven energy markets. The EU’s era of low gas prices and minimal spare capacity is over: for the EU, security of supply means more regulation of both infrastructure and trade.
Published 24. October 2022