The moves are part of a scramble in Europe to respond to the energy crisis prompted by Russia’s invasion of Ukraine. Russian President Vladimir Putin in recent days lashed out at his foes in the West by cutting off natural gas supplies to Bulgaria and Poland for refusing to pay in rubles. Other large consumers of Russian gas, including Germany and Italy, have sought to reassure their citizens that they are seeking workarounds if Putin expands the cutoff as he has threatened.
But under almost every scenario, the next 18 months are going to be a harrowing time for Europe, as the impacts of high prices ripple around the world and governments struggle to power their factories, heat their homes and keep their electricity plants running. There are not enough alternatives in the near term to avoid major economic pain in the coming winter if Russia shuts down supply. This month, for instance, the German central bank warned that the country’s economy could shrink by 2 percent if the war persists.
“This is a very dangerous game that is playing out,” said Edward Chow, an energy security scholar at the Center for Strategic and International Studies who previously worked in the industry for decades. “I don’t know how this is supposed to end. It feels like it is going to end in a very bad place for both Western Europe and Russia.”
“There is only so much [natural gas] to go around,” Chow said. “No one is going to be able to produce more liquefied natural gas quickly no matter what fantasies governments want to spin.”
What has transpired is a sudden global reordering of the energy markets stoked by an abrupt turnaround by Russia, which spent decades trying to use its generous oil and gas reserves to integrate into the world economy, said Daniel Yergin, an energy historian and vice chairman of S&P Global.
For now, Europe’s gas market has become a patchwork. Italy can turn to Algeria, Bulgaria can turn to Greece, and Poland can pivot to a long-planned expansion of a terminal for liquefied natural gas, or LNG, imports and a pipeline coming online from Norway.
“It’s a dramatic, unexpected reordering of world energy. Two months ago the Europeans could not possibly have imagined shutting the door on Russian energy and now it’s only a question at this point of how long will it take,” Yergin said. “And it’s happening faster than would have been imagined possible only two months ago. Putin in eight weeks of war has destroyed what he spent 22 years building: integrating Russia into the world economy.”
Germany, the economic engine of Europe, is particularly unprepared for the moment. More than half its supply of natural gas was coming from Russia before the invasion of Ukraine.
Germany has shrunk that down to 35 percent, but it is not well positioned to get to zero Russian gas anytime soon. It lacks infrastructure to import liquefied gas, and the nation’s aggressively anti-nuclear posture has left it with just three reactors online; the other 14 were closed down after the tsunami hit the Fukushima nuclear complex in Japan in 2011.
German Economy Minister Robert Habeck has said he expects his country would slide into recession without Russian gas. “I take this very seriously,” he said.
The country has managed to cut Russia’s share of Germany’s crude oil imports from 35 percent to 12 percent.
It has implemented the early-warning phase of an emergency energy plan, including a public campaign to push conservation. But if natural gas supplies drop precipitously, the next step could be rationing.
Gas would flow first to hospitals and households, leaving businesses at risk of losing power. Officials and analysts have warned that the fallout could be a deeper recession than Germany’s central bank projected earlier this year, as factories shutter, hundreds of thousands lose jobs and inflation soars.
Instead of buying oil and natural gas from Russia — where production costs are very low and pipeline transportation cheap — Europe must turn in the immediate term to more expensive alternatives such as the United States, which until seven years ago had no gas export facilities at all. European companies must add on $1.50 per thousand cubic feet — anywhere from 30 to 50 percent of the cost of the gas itself — to get a tanker of liquefied natural gas to make the trip from the Gulf of Mexico to Europe. Then the empty ship must make the return voyage, a total of 24 days in transit.
European nations are also moving as nimbly as they can to diversify their supply, but energy producers can’t keep up. A quick turnaround project that makes available new supplies of natural gas typically takes at least two to four years. At the same time, investors may be wary of big, long-term natural gas projects as governments and businesses soon look to more environmentally friendly types of energy.
Renewable energy — predominantly solar and wind — has received a jolt from the current crisis. “This will put the European transition to renewables and other sources of gas on Jet Skis,” said Cliff Kupchan, a political analyst and chairman of the political risk consulting and advisory firm Eurasia Group.
But for all the talk of Europe stepping up its efforts to bring more renewable energy online, that is also a long-term proposition, complicated by supply chain issues and environmental disputes.
The prices of renewable energy worldwide, after roughly two decades of decline, have edged up over the past year, and there is little room in Europe to quickly add legions of new renewable customers.
Roberto Cingolani, the minister in charge of Italy’s energy transition, said in an interview that Italy has been racing to reach deals with a number of African countries, and is now hoping to be energy independent from Russia by spring of 2024.
He said Italy is better positioned than other European Union nations to handle the transition, because it already has two pipelines to Africa and another going east toward Azerbaijan. But he said that the contingency plan will take some time to ramp up and that the country would be vulnerable in the short-term if Russia suddenly cuts off its supply.
Under such a scenario, Italian consumers could be asked to reduce air conditioning use. And companies could face programmed interruptions of their energy supply. “The hope is that we don’t have to do that much,” Cingolani said. “The hope is that we don’t have to do anything at all.”
One thing that could ease some pressure on energy-consuming nations would be a slowdown in the world economy. The latest lockdowns in China to stamp out the coronavirus have probably lowered world oil demand by 1 million barrels a day, the advisory firm S&P Global estimates, making it difficult for Beijing to come to Moscow’s aid. The United States and other countries are drawing down strategic stockpiles at a rate of 1.3 million barrels a day. The International Monetary Fund estimated that the world economy would slow to 3.6 percent this year.
This is also the time of year when Europe is supposed to be building up gas storage. Last year, Russian cuts in supplies made it difficult to get through the winter. If Russia cut all its gas flows, the worst-hit countries would be Germany, with storage currently just 33.5 percent full, Italy at 35 percent, and Hungary at 19.4 percent, according to a note to investors from RBC Capital Markets, an investment advisory arm of RBC.
Where this all goes depends on the Kremlin’s next moves. Russia is heavily reliant on gas and oil revenue, and it would inflict economic pain on itself by cutting Europe’s major economies off from natural gas. At the same time, its European customers have already vowed to be done with Russian imports altogether by 2027. Russia’s ability to use its power over the flow of energy as an economic weapon against Europe is only going to diminish. Some analysts suggest that could push Russia to use that weapon now, while it has leverage.
All of this is creating fresh opportunity in Algeria and other African nations.
Algeria was already exporting gas to Europe before war broke out. It was sending it by pipeline to Italy and Spain. Algeria also has extra capacity in facilities that turn natural gas into a liquid fit for shipping. There were a number of issues inhibiting further exports, some of them involving concerns about there being enough fuel for domestic consumption as the nation’s economy grows, as well as geopolitical considerations around getting too closely tied to Europe.
But the No. 1 thing holding back Algeria and other African nations sitting on large reserves of natural gas has been Europe’s preference for gas from Russia, which was cheaper and more readily available, said Vijaya Ramachandran, an Africa energy expert at the Breakthrough Institute in California. Europe also saw in Russian gas an easier path to transitioning to renewables, as it did not require major new investment in pipelines and other infrastructure at home and abroad.
“Africa has wanted to develop its natural gas reserves for a long time,” Ramachandran said. “But investors have been mixed, saying it is too difficult, too far away, too expensive. That calculus has changed. This is a moment for Africa. And I think for countries in the region that have substantial reserves and are being looked at by European investors with a great deal of interest.”