Europe's plan to become independent of Russian gas

Carlos Marcelles de la Casa

I. Why is this independence necessary?

Kotka is a small Finnish town 50 km west of the Russian border. From its industrial port, one of the busiest in the country, it is possible to make out a huge flame coming from the outskirts of St. Petersburg. This is a sure sign that, as Europe prepares for an uncertain winter marked by high energy prices, Russia is burning gas nonchalantly. Specifically, according to Rystad Energy, Putin burns about €10 million per day of gas that he could send to the EU through the Nord Stream 1 pipeline, recently shut down by Gazprom (Rystad Energy, 2022).

Thus, the Russian invasion of Ukraine has highlighted the need for greater pan-European integration and collaboration, especially in terms of energy security and independence, (which is the subject of today's discussion). This idea, which was already a social conscience thanks to the Covid-19 pandemic, is now a political conscience as well. In light of this, this autumn and winter will test the soundness of these political intentions. European governments will have to allocate more resources to the common good at the same time as their economies enter into crisis and even recession. In other words, national political leaders will have to increase collaboration among their counterparts at a time that naturally encourages introversion.

The Russian invasion of Ukraine has highlighted the need for greater pan-European integration and collaboration.

All Western European countries are suffering the consequences of high energy prices, which will inevitably become (or is already a reality) one of the main electoral concerns on the continent. However, this fact is nothing more than Putin's instrumentalization to stop Western aid to Ukraine. Thus, the temptation to do so, as well as the pressure to put national interests first, will only grow as the economic and social suffering from energy bills becomes more severe over the winter.

II. Sanctions policy

It has been six months since Russia began its invasion of Ukraine. On the battlefield, a war of attrition is being waged along a kilometer-long front stretching from the Black Sea to Kharkov. The recently launched counteroffensives in Kherson in the north and Izium in the south (see picture 1), may be the breaking point of this situation. In fact, these have forced Vladimir Putin for the first time to pronounce the word "war" in his last address to the nation and to decree a partial mobilization affecting some 300,000 reservists (Reuters, 2022). However, while the military struggle continues to reap lives, the economic struggle also continues fiercely, to an extent not seen since World War II. In doing so, the West is trying to cripple the world's 11th largest economy (by GDP) through a varied arsenal of sanctions. The final outcome of this war depends to a large extent on the efficiency of this struggle.

Image 1: war situation as of September 19, 2022. Source: Ecoavant.com, 2022.

In light of this, since the beginning of hostilities, the US and its allies have applied a diverse sanctions regime. Half of Russia's foreign exchange reserves are frozen, its major banks are cut off from the SWITCH system of world payments, Europe seeks alternatives to Russian gas, Russian companies cannot buy Western inputs of any kind, Russian oligarchs and high-ranking officials have assets frozen and passports denied, some European countries put obstacles in the way of granting visas to Russian citizens, etc. (Fragomen, 2022).

On the efficiency of this economic struggle depends to a large extent the final outcome of this war.

In addition to satisfying public opinion, these measures have more strategic objectives. In the short term, the idea was, at least initially, to trigger a liquidity and balance of payments crisis in Russia that would make it difficult for the Kremlin to finance the war. In the long term, on the other hand, the intention is to damage Russia's productive capacity and technological sophistication, so that, if Putin aspires to invade another country, he will have fewer resources available. An ultimate goal is to deter others from waging war.

However, the sanctions weapon has serious flaws. One is time lag. Blocking access to technology that the West monopolizes takes years to take effect, and autocracies are good at absorbing the initial shock of an embargo because they have the capacity to marshal resources. Moreover, the consequences must be taken into account. Although the West's GDP is much larger than Russia's, there is no denying that Putin is bathing in gas while Europe is begging for it. Hence, the major flaw is that full or partial embargoes are not enforced by more than 100 countries with 40% of the world's GDP (Financial Times, 2022). When Urals oil does not flow to Western Europe, it flows to Asia. China has already announced that it will pay Gazpron in yuan and rubles, instead of US dollars. From Emirates, you can fly to Moscow up to seven times a day. A globalized economy adapts well to shocks and opportunities, especially since most countries do not want to impose Western policies. For all these reasons, this economic war reveals the declining ability of Western liberal democracies to exert a hegemonic and globally dominant force.

III. The liquefied natural gas crossroads

In 2021, Russia provided about 40% of the gas consumed by the EU. Since the invasion of Ukraine, the numbers have changed rapidly. On May 31, Gazprom, announced that it would stop supplying gas to GasTerra, (Netherlands), and Orsted, (Denmark), after both refused to pay in rubles. Shell's supply to Germany was also cut off. The decision was a retaliation by the Kremlin, since the day before, the EU had announced a ban on the purchase of Russian oil, which included 75% of Dutch oil imports and 90% of Danish imports by the end of the year. In addition, Russia had already cut gas supplies to Bulgaria, Finland and Poland (Financial Times, 2022).

To get rid of Russian supplies, many European countries have resorted to liquefied natural gas (LNG) imported from the United States and Asia. These imports were up 47.7% year-on-year in April, and up 19.9% from March (The Economist, 2022). However, this liquid supply must be returned to its gaseous state before being shipped to end customers. Until recently, Europe appeared to have sufficient processing facilities and, in theory, can handle enough LNG to replace almost two-thirds of Russian gas.

But, as Russia begins to turn off the tap, a shortage of processing facilities and pipelines for further transport becomes apparent. Herein lies the problem. Most of Europe's regasification capacity is in the south and west; Britain and Spain have about half. The landlocked countries in the east, which are the most exposed to Russian energy, have difficulties. The infrastructure to send the gas to where it is needed is lacking. In recent months, the two pipelines through which Britain sends gas to Europe have been running at full speed. However, in the south, France has thwarted the creation of a pipeline from Spain to send Algerian gas to Germany (Euronews, 2022). A decision that only obeys France's geostrategic interests and completely ignores the pan-European interest (see image 2). We will see if, at the Spanish-German Summit, which will take place in La Coruña between October 5 and 6, 2022, Sanchez and Scholz come up with a plan to change Macron's mind.

Image 2: MidCat gas pipeline project. Source: Heraldo de Aragón, 2022.

Germany is a case that requires special attention. The German country has been particularly affected, as it depends on gas for its industrial economy, especially after the closure of its nuclear power plants; but, at the same time, it still has no LNG terminals in operation. Before the war, it obtained 55% of its gas from Russia, at a cheap price. In the light of the invasion, the government has rushed to reverse this situation (The Economist, 2022). On May 19, the German Parliament passed a law to speed up the approval and construction of terminals (removing several environmental controls). However, the construction of land-based facilities takes time. A quick solution is to acquire floating storage and regasification units (fsrus) (Figure 3). These are simply vessels that convert liquid fuel back into gas. The German government plans to install four in the near future, at a cost of almost 3 billion euros ($3.2 billion). The first project, at Wilhelmshaven in the North Sea, could start operating within a few months and will have a capacity of 7.5 billion cubic meters per year, equivalent to about 8.5% of Germany's gas demand (Green Wilhelmshaven, 2022).

Image 3: LNG carrier (left) next to an FSRU (right). Source: Portal Portuario, 2022.

IV. Other countries follow the initiative.

Poland, which relied on Russia for about half of its gas (although about 70% of its energy comes from coal), plans to bring forward the opening of one fsru to 2025 and is considering installing another, which would allow it to sell more gas to landlocked countries such as the Czech Republic or Slovakia (The Economist, 2022).

France and Italy have begun the process of acquiring their own; on May 30, Italian energy company SNAM reached a $350 million deal to buy a vessel. In the longer term, more onshore terminals are planned. Germany is going ahead with two that, combined with fsrus, would give it an import capacity of 53 billion cubic meters a year, more than it bought from Russia in 2021. A third is planned (Ibid, 2022).

Environmental groups complain that costly investments in fossil fuels run counter to European emission reduction targets. But for now, reducing dependence on Russian energy is the continent's priority.

V. Beyond this war

Six months after the invasion began, Western democracies are adapting to the new reality of war. NATO weapons are regularly entering Ukraine (which also predictably feeds and will feed a potent black market for weapons in Ukraine, especially after the cessation of hostilities), the Alliance is fortifying Europe's borders with Russia, and Europe is securing new sources of gas, which, on the other hand, could provide an opportunity to accelerate the transition to cleaner energy, such as nuclear or renewables. The United States is also reducing its dependence on Chinese technology and urging Taiwan to improve its defense capabilities.

Western democracies are adapting to the new reality of war.

The problem is that all autocracies, from Belarus to Xi Jinping's China, are also studying the sanctions war with Russia and are busy learning the same lessons. Ukraine marks a new era of 21st-century conflict in which military, technological and financial elements are intertwined. But it is not an era in which the West can arrogate itself to preeminence. No one can counter an invasion with dollars and semiconductors alone. Confronting aggressive autocracies requires action on several fronts. Hard power remains essential.

Bibliography

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