Natural gas is one of several commodities massively impacted by Russia's invasion of
Ukraine. The European Union receives about 40% of its natural gas from Russian
pipelines, about a quarter of that flows through Ukraine.
Energy is really at the front and center of the conflict that we've seen between Russia
and Ukraine.
And basically Europe is really heavily dependent on Russia for fuel,
but Russia is dependent on Europe for revenue from those fuel sales.
So it's really this complicated, codependent relationship that spans decades.
What we're seeing here is the consequence of Europe's allowing itself to
become so reliant on Russian natural gas and oil
to the extent that firstly Vladimir Putin has been able to build up and
modernize Russia's military, reestablish Russia as it's a great power
capable of winning multiple wars.
Natural gas prices reached record highs in October 2021, and prices have kept
climbing since hitting a new all-time high in March.
Prices on the Dutch TTF hub, a European benchmark for natural gas trading, more than
tripled between February 16 and March 7th, 2022, before pulling
back. The U.S.
along with its partners, have imposed severe economic sanctions targeting Russia's financial institutions
and members of its elites.
But despite sparking the largest military conflict in Europe since World War Two, Russia's
natural gas continues to flow through Ukraine to Europe.
Russia has been accused of using its natural gas as an economic and political bargaining chip.
So what role does natural gas play in the ongoing tensions between Russia and Ukraine, and how
are Europe and the U.S.
impacted?
Russia is the largest exporter of natural gas globally and the second largest producer behind the
US. For decades, Russian natural gas has powered European homes and
industries. In 1968, Austria and the Soviet Union signed a gas deal, and
in the early seventies, natural gas shipments began arriving in West Germany from the Soviet Union.
But a 1981 CIA intelligence assessment of a proposed 3,000 mile long
natural gas pipeline from Siberia to Western Europe warned of trouble ahead.
It said the pipeline would be a reliable source of gas for the continent, but it would also give the
Soviets political leverage over Europe.
Now those problems are ringing true.
If you go all the way back to the Soviet period and then the immediate post-Soviet period, pretty much
all Russian gas flowing to Europe flowed through Ukraine.
Then starting really in the nineties, Russia started building additional
infrastructure that didn't cross through Ukraine.
The breakup of the Soviet Union in 1991 added an additional layer of complexity
after the dissolution of the USSR many natural gas pipelines were no longer in direct
control of the Russian Federation.
Russia always found it a bit unfortunate that they had to pay a transit
fees for transiting both Belarus and Ukraine.
Now with Belarus, they put so much pressure on the country that at some point Gazprom was able to
buy the pipeline.
Ukraine was always the problematic child that they didn't like and that they have problems
with.
Russia has had a long running dispute with Ukraine over the terms of their natural gas relationship.
Because Russian gas travels through Ukraine, Russia pays costly transit fees to the
Ukrainians.
Russia has built its entire economy on the export of hydrocarbons,
and Russia is not really able to sell natural gas anywhere else than to the European
Union. There's one tiny pipeline to China, but Europe,
by geographic proximity, by ability and willingness to pay, was always the
prominent and most liked destination market for the Russians, and Ukraine was
sitting right in the middle of that.
Russia's state owned energy company, Gazprom, briefly cut off gas supplies in
2006, accusing Ukraine of corruption and stealing gas from pipelines, an
accusation it denied at the time.
A few years later, Gazprom cut off supplies again, following a breakdown in negotiations
with Ukraine over outstanding debts and prices.
By 2009, around 80% of Russian gas heading to Europe ran via
Ukraine. Gazprom was supplying 25% of Europe's needs.
At the same time, Russia was adding additional capacity.
In the 2010's, the 760 mile long Nord Stream pipeline connecting
Russia with Germany via the Baltic Sea began operations.
A decade later, the TurkStream natural gas pipeline connecting Russia's largest gas reserves
with Southern Europe via Turkey kicked off.
Construction was completed in 2021 on the Nord Stream 2, a companion
pipeline designed to double the flow of Russian gas directly to Germany.
But with the Ukrainian crisis deepening, Germany froze its participation in the $11
billion project.
Essentially now having four big gas corridors from Russia to Europe,
one through the Baltic Sea, one through Belarus, one through Turkey,
all of which are controlled by Russia, as well as the one through Ukraine, which is still
not controlled by Russia.
And that has always upset the Russians, and they wanted to circumvent it in order
to get rid of this choke point in Ukraine.
As of 2019, Ukrainian state-owned oil and gas company Naftogaz
collected $3 billion a year in transit fees from Russian gas moving through its country.
Crude oil and natural gas revenue made up on average about 43% of Russia's total
annual revenue between 2011 and 2020.
Each day, oil payments from Europe to Russia total about $285
million. In 2021, the European Union imported 155
billion cubic meters of natural gas from Russia.
Germany alone gets half of its gas from the country.
But more than a month after its invasion and with a widening number of sanctions, why is
Russian natural gas still flowing through Ukraine?
Even during this war, we're still seeing supplies flow through Ukraine, out of
Russia and into Europe.
And that really speaks to this codependent relationship and how important energy is within
the context of this war.
According to one analyst, it's not in anyone's interest for the flow of natural gas to stop.
From the gas industry perspective, we're not surprised.
But outside the gas, if you're not familiar with European gas, there's a horrible
invasion and horrible war going on and the gas is flowing generally
and also through Ukraine as if nothing were happening.
It does seem strange, but the fact of the matter is that Russia, as we've seen more
recently, is taking a different approach with European gas.
What's happening is the Russians are making a lot of money with it.
I mean, they are making hundreds of millions of dollars every day by this gas that
they are selling to the Germans and the Europeans.
The Europeans, on the other hand, they are highly dependent on Russian gas for filling their storages and they
are super afraid that if they are not getting the gas from Russia anymore at one moment in
time they will have to drastically cut demand also in sectors where it really
hurts like industry, households, electricity.
Nobody really likes to help the other, but it's essential for each of them to
keep the flow going.
In recent decades, Europe has also seen domestic production dwindle.
For example, Dutch and British production declined by almost 75 and 65%,
respectively, from their previous highs two decades ago.
And stopping the flow of natural gas to Europe might not be in Ukraine's interest either.
Ukrainians think we want also the money of the transit fees from this
and we don't want to be to blame for this thing going wrong because if we are to blame, if the thing goes
wrong, then they are just going to switch on Nord Stream 2 and we win nothing out of that.
So they try to to play this very dirty game or they have to play it, which they are certainly
also not liking to, to see but the alternatives are limited.
Natural gas prices in Europe and Asia reached record highs in the fall of 2021 due to
increased demand from businesses and consumers returning to pre-pandemic activities.
The war in Ukraine has seen natural gas prices spike yet again.
European gas markets are completely crazy right now.
I mean, it's a purely political market.
It's not a market about short term supply and demand.
It's not a market about long term supply and demand anymore.
It's just a market that looks into the into the news every day and sees
how good or bad the conflict is evolving.
EU and Russia relations have been strained since Russia's 2014 annexation of Crimea
triggered sanctions on Moscow.
Russian support of separatists in eastern Ukraine, in which about 14,000 people were killed,
has also been a source of tension.
But it was the invasion of Ukraine that may have had an even bigger impact on the country's role as an
energy superpower.
Germany froze its participation in the Nord Stream 2, a 760 mile long
pipeline under the Baltic Sea connecting Russia to Germany's coast.
The pipeline, completed last September, was opposed by the U.S.
on fears it would deny transit fees to Ukraine and raise Europe's energy dependance on
Russia. Shell, BP and ExxonMobil announced they were exiting multibillion
dollar oil and gas projects in Russia, and in March 2022, the EU
devised a plan of its own to reduce demand for Russian gas by two thirds in
2022 and make Europe independent from Russian fossil fuels by 2030.
But as it moves away from Russian natural gas, how does Europe intend to fuel its industries and
heat its homes?
One thing that Russia's war in Ukraine is really bringing to the fore is energy policy
on the short term and long term basis.
Right now, there are all these fears about fuel shortages.
If infrastructure is damaged, if Putin decides to weaponize energy and turn off the taps, what
are we going to do? So right now everyone's saying we need to pump more, we need more oil, we need
more gas just because there's this big fear that our renewable infrastructure is not
quite there yet.
In March 2022, the global energy group IEA came out with a blueprint for
Europe to reduce its dependance on Russian energy, including not renewing expired
contracts, replacing Russian gas with alternative sources, and accelerating the
deployment of wind and solar projects.
While some argue the shift could help accelerate a greener Europe, the report acknowledged some
remedies came with significant trade offs, such as relying on coal or using oil within
existing gas fired plants.
In the past, Russian natural gas has been a bridge in Europe's transition from fossil fuels, like
coal to solar and wind power.
Europe hopes to become the world's first climate neutral continent by 2050 and pledged to
reduce emissions by at least 55% by 2030.
Another headwind facing Europe is its gas storage levels remain below normal.
One very unfortunate situation.
Structures in Europe are relatively empty.
Europeans want to prepare for the next winter because they know that if they are not prepared for the next
winter, they will be subject to Russian blackmail in peace negotiations on Ukraine.
Europeans really need to get their act together to get their storages full otherwise, we'll have the gas
gun to our head and they will tell us where to sign the treaty.
So we need to do something but what gas can we use to fill our storage is Russian gas, so
we are paying them more in order to be protected from them later on, which is a very unfortunate
situation.
The continent could find some relief, however, from America's natural gas market.
U.S. exports of natural gas have soared to a record 5.3 trillion cubic feet in
2020, 13% higher than the previous year.
More than half of U.S.
natural gas exports that year were shipped via pipelines to Mexico and Canada.
The remainder were sent overseas as liquefied natural gas.
The US and its partners intend to provide an additional 15 billion cubic meters of liquefied
natural gas to the EU this year.
It's important to note that we're already at max capacity.
We're already sending record amounts to Europe, and that's a change from prior years.
Essentially what happened is that cargoes that were heading to Asia were diverted and went
to Europe instead.
Now a lot of that was because of pricing dynamics.
If you're going to get a higher price in Europe, you're going to send your cargo to Europe rather than to
Asia.
And energy intensive exports produced in the U.S.
could also help alleviate some of Europe's need for Russian natural gas too.
There are also certain intermediate products or even final products that the U.S.
could export, be it things like paper or steel, but also ammonia,
methanol. So things that are highly energy intensive that the European industry and the
European consumers like to use but where we should not use too much gas for at the
moment because gas is in short supply if we don't want to rely on the Russians.
But for the moment, natural gas seems to be caught in the crossfire of the Ukraine-Russia
conflict.
It's not a small conflict somewhere in the backwaters of the oceans, but it's really
one of the global and determining conflicts of our time and what might
happen, and currently it seems quite likely to happen, will be a complete
unbundling of the Russian energy superpower and the European super
energy consumer.