DATACRUNCH: Sanctions by the numbers – gas

DATACRUNCH: Sanctions by the numbers – gas
Cutting off Russian supplies of gas to Europe is the hardest of the sanctions on the table. it is possible but Europe would have to put itself on a wartime footing and act decisively to make it happen. / bne IntelliNews
By Ben Aris in Berlin April 14, 2022

ED: This article is part of the series DATACRUNCH: Sanctions by the numbers that dives into the numbers and trends of UN voting, coal, oil, gas, grain.

Voices are calling very loudly for the EU to shut off deliveries of Russian gas immediately. Since the start of the conflict in Ukraine, Germany has paid Russia some €9bn a week for gas imports, which are currently running at a contractual maximum; money, Russia’s critics say, that is being used to fund the Russian war machine.  

But German Chancellor Olaf Scholz is very reluctant to do it, warning of an economic disaster. Economic institutes advising the government warned on April 12 Germany could face a €220bn ($240bn) hit to output over the next two years if Russian energy is cut off, and a full halt in Russian natural gas imports would result in a “sharp recession.” The loss to Europe’s biggest economy would be equivalent to 6.5% of annual output, they said.

Estimates of the economic hit to Germany are of the order of a 2%-3% contraction in GDP, something the most prosperous country in Europe can well afford, say his detractors. Moreover, there is widespread German public support for a ban on Russian gas imports. The new chancellor seems to be listening more to industry than his voters, say critics.  

But digging into the weeds, it is not as simple as it appears. The main problem is the Russian gas is impossible to replace in the short term and cutting off Russian gas will cause an energy crisis in Europe and probably in the whole world.  

Cutting Europe off from Russian gas will immediately have an impact on Europe, and Germany in particular, but there are multiple secondary effects. The German economy would contract, but the energy crisis thus created would spread much further afield. One of biggest problems is that Germany doesn't use all the gas it imports from Russia. It is the main European gas hub. About half the gas it receives is sent on to supply other countries – Italy in particular. In addition, it has the largest storage tanks of any country in Europe after Ukraine and is a key part of the storage of gas to get through the winter.  

Germany re-exports half the gas that it receives, thereby supplying other gas-dependent countries. In 2020, Italy imported 34.9% of its gas from Russia and is one of Gazprom’s biggest European customers, almost all of which transited through Germany, according to OEC.

Another affect is if Russian gas were cut off then there would be a mad scramble for LNG to replace it, but there is simply not enough LNG available to replace the 152bn cubic metres that Europe imported from Russia last year. The volume of gas Russia sends to Europe is equivalent to one third of global LNG production, but 70% of LNG production is already tied up in long-term contracts, leaving very little wiggle room indeed to increase supplies to Europe, and far short of what would be needed to replace Russian imports entirely. Even if there was more LNG available, the existing LNG terminals are mostly already working at close to capacity and simply do not have the capacity to handle another 152 bcm equivalent of deliveries a year.  

Without Russian gas deliveries to Europe prices would spike, affecting the UK and Portugal in particular, which are both heavily dependent on LNG imports.

The spike in LNG prices would also cause an energy crisis in Asia, which is also heavily dependent on LNG as supplies are drawn away to Europe. The problem is made even more complicated, as Russia is also the biggest supplier of LNG to Europe. The US has said that it could increase LNG supplies by 10-15 bcm but that would only replace the banned Russian LNG. Qatar also said it could redirect another 15 bcm to Europe, but that is only 10% of the missing Russian gas.  

The end of gas imports to Europe would also cause a major energy crisis in the coming winter. In another sign of how conflicted Europe is over Russian gas, the EU has ordered that all its storage tanks be filled to 80% by October 1, the start of the heating season, a historic high. That means pumping as much gas as possible between now and then if that target is to be hit.  

At the same time, countries like Poland are calling for the gas supplies to be shut off now. The storage tanks are currently 26.8% full, but the remaining gas would be enough to get through the summer without Russian imports. But if the process of filling the tanks is not started during the spring there is simply not enough time to fill them to the point needed to get through the winter. Europe would run out of gas to heat homes during the coldest part of the year, and as this would become obvious by mid-summer, prices would soar to even higher levels than Europe experienced last summer as bne IntelliNews described in the gas crisis feature “V-shaped market”.  

It is possible to cut off Russian gas, but it would mean the whole of Europe shifting to a wartime mentality, similar to the German Berlin airlift at the start of the Cold War, Christof Ruehl, senior research scholar, Columbia University and the former chief economist at bp, in a recent podcast with bne IntelliNews. That means turning thermostats down from 22C to 10-15C, a slowdown in industrial output, power rationing and rolling black- and brown-outs as well as unaffordable energy bills for the population that governments would have to subsidise at the cost of billions of euros.  

Energy dependency  

How did Europe get into this mess? The attitude to Russian gas varies vastly from country to country. Poland is largely reliant on coal-fired power stations and is able to fuel its power and heating stations from domestically produced coal while switching away from Russian imports.  

Other countries like German and Turkey are so reliant on Russian gas that they have little choice but to keep buying the fuel. Despite the extraordinary acceleration in the switch to renewables, most of Europe is still years away from being able to power itself entirely without using Russian gas.  

Germany has made amazing progress in developing renewables, which at 40% of gross power generation are now by far the largest contributor to energy production. Renewables make up 34% of the EU average power mix, but only Norway and Iceland have transitioned to 100% renewable power generation, with Albania in third place with 84% and Austria, Sweden, Denmark, Portugal and Latvia all now producing more than half their power from renewables.  

While new renewable resources are being developed, Germany’s plan to end fossil fuels entirely by 2025 anticipated that imports of Russian gas would actually increase in the short term as coal-fired and nuclear power plants are shut down. Gas was seen as the cleanest of all the fuel alternatives to carry the load while new green production was built.  

Almost 60% of the EU’s energy needs were met by net imports in 2020, according to Eurostat. Germany’s energy import dependency was still higher at 63.7% – a slight decrease compared with the previous year’s 67%.

Countries with a higher energy import dependency than Germany are: Malta (97.6%), Cyprus (93%), Greece (81.4%), Belgium (78.1%), Lithuania (74.9%), Italy (73.5%), Ireland (71.3%), Netherlands (68.1%), Spain (67.9%) and Portugal (65.2%).

In 2019, the EU member state with by far the least energy import dependency was Estonia (4.8%), followed by Sweden and Romania (both 30%). Estonia’s high degree of energy self-sufficiency is based on domestically produced oil shale, according to the 2019 International Energy Agency (IEA) country report.

Together, energy imports of oil, gas and coal make up around 15% of total EU imports (in terms of value).

More than two-thirds of the EU’s energy imports in 2020 were petroleum products, followed by gas (about a quarter) and coal (less than 5%). Russia was the main extra-EU supplier in all three categories (25.5% petroleum, 43.9% gas and 54% solid fossil fuels), followed by Norway for natural gas and the US for crude oil.

The use of gas in Europe is fairly evenly divided between cooking and heating in buildings (35%), power and heat generation (31%), industry (23%), with transport (1%) and other (10%) bring up the rear, according to Eurostat.  

The production of energy in the EU is spread across a range of different energy sources: solid fossil fuels, natural gas, crude oil, nuclear energy and renewable energy, including hydro, wind and solar energy.

Renewable energy (37% of total EU energy production) was the largest contributing source to energy production in the EU in 2019. Nuclear energy (32%) was the second-largest source, which has recently been classified as a renewable energy source by the EU. Solid fuels come in third place (19%), followed by natural gas (8%) and crude oil (4%).

The production of energy is very different from one member state to another. The significance of nuclear energy is particularly high in France (78% of total national energy production), Belgium (71%) and Slovakia (58%). Indeed, last year’s gas crisis has already led Belgium to extend the life of a 2-GW nuclear power plant (NPP) for another ten years to secure its energy needs and the war in Ukraine has spurred Germany into building its first two LNG terminals.  

Renewable energy is the main source of energy produced in a number of member states, with over 90% (of the energy produced within the country) in Malta, Latvia, Portugal and Cyprus. Solid fuels have the highest importance in Poland (77%), Estonia (62%), Czechia (52%) and Greece (49%), while natural gas is the main source of energy produced in the Netherlands (72%). Crude oil is the major source of energy produced in Denmark (41%).

In 2019, the extra-EU's crude oil imports came from Russia (27%), Iraq (9%), Nigeria and Saudi Arabia (both 8%) and Kazakhstan and Norway (both 7%).  

Also in 2019, the EU's imports of natural gas came from Russia (41%), Norway (16%), Algeria (8%) and Qatar (5%), while over three quarters of solid fuel (mostly coal) imports originated from Russia (47%), the United States (18%) and Australia (14%), according to Eurostat.

The main producers of gas in Europe are Norway, the Netherlands and the UK, although the British North Sea fields are now almost depleted.  

The Netherlands was a major player in Europe’s indigenous supply but, as bne IntelliNews reported, the biggest Dutch gas field, the Groningen field off the coast of the Netherlands, was Europe’s largest gas producer but has been taken out of service as production activities led to earthquakes. Europe’s indigenous gas production has been declining rapidly in recent years, contributing to last year’s crisis and only increasing the dependency on Russian gas, which has risen from 35% of total gas imports to 40% now in the last three years. Norway’s fields are also past their peak and are currently maxed out. There is no spare capacity to increase sales to the rest of Europe.

Germany hardest hit  

So far Lithuania is the only European country to have cut off Russian gas, but its two Baltic neighbours have not.  

“From this moment on no more Russian gas in Lithuania,” President Gitanas Nauseda signed off on a new long-term contract with Gazprom, which provides for payment in euros.

Politics are keeping other countries in board with Gazprom. Budapest is currently embroiled in a row with the EU after it said that it would concede to the Kremlin’s demand to rubles-only-for-gas deal. Hungary plans to pay for Russian gas in euros through Gazprombank, which will convert the payment into rubles to meet a new requirement set by President Vladimir Putin, Foreign Minister Peter Szijjarto told reporters during a break at a meeting of EU foreign ministers in Luxembourg on April 11. EU President Ursula von der Leyen accused Budapest of sanctions busting. Szijjarto countered that the deal was nothing to do with the EU, as it is a contract between two parties and the currency could be changed if both sides agreed.

Serbia, another close Russian ally, has also agreed to pay for its new long-term contract in rubles.  

Western Europe has been resisting the rubles-for-gas deal and will be hurt far more by the potential ban on Russian hydrocarbons. Germany is the most exposed.  

Analysis by Econtribute offers a range of estimates, but their worst-case number is that an embargo on Russian gas would temporarily reduce Germany’s real GDP by 2.1%. Other estimates put the contraction at 3% of GDP. Germany is the world’s biggest gas importer and gets around 95% of its gas consumption from imports, according to the BGR.

Europe as a whole imports 41.1% of its gas, which was worth $69bn in 2020. Italy, Germany and France are the three biggest importers, accounting for a quarter of all imports between them. But gas plays a much larger role in Germany’s energy mix than the others.

Europe’s total gas demand was about 400 bcm in 2020, of which Russia sent 152 bcm to the EU in 2021 (38%). Germany imported the largest share of that: 142 bcm of gas, of which 100 bcm was used by households for heat and cooking, according to the foreign trade statistics office BAFA, which does not identify the origins of imports. BAFA stopped publishing import volumes by country in 2016, because of new stricter privacy rules.  

In addition to its own use of gas to power its economy, Germany is also home to the largest gas storage tanks in Europe, other than Ukraine, and re-exports about half of the gas it receives. Ukraine’s 33.57 bcm of gas storage is just under 80% of all gas storage capacity outside the EU and essential to ensuring there is enough gas during the winters. Ukraine’s storage is also about 21% of all of Europe’s (EU and non-EU) storage capacity.  

The EU gas storage capacity is a significant 161 bcm, with Germany having the most individual storage capacity (26 bcm), followed by Italy (20 bcm) and the Netherlands (15 bcm). This role of being the largest warehouse of gas in the EU makes Germany a gas hub and is another reason the country has remained so committed to buying Russian gas.  

Germany gets a lot of its gas from Norway and accounts for 42.8% of all Norwegian gas exports, but Norway’s fields are already maxed out and also in decline.  

Because BAFA does not publish details on the origin of gas imports there is some confusion over just how much each country supplies. Consultants ICIS estimates for German supply show that in December 2021 Russian pipeline gas accounted for 32% of Germany’s imports, Norwegian gas 20% and Dutch 12%, with another 22% of gas supplies in storage and the rest from other smaller sources including a tiny amount of domestic production. In 2020, the country produced 5.7 bcm of natural gas, but according to geologists, the fields are nearing depletion. However, Germany also imports 11% of its gas from Czechia, which is also Russian gas in origin, bringing Germany’s total reliance on Russian gas to 43%, according to ICIS estimates. However, the economy and climate ministry said in 2022 that 55% of gas imports came from Russia in 2021.  

All of Germany’s gas is delivered by pipeline, with Nord Stream 1 and 2 being the most famous, but it also receives gas via the Yamal-Europe pipeline that runs from Russia via Poland, and another smaller pipeline that connects Germany to Czechia.  

Currently, most of Germany’s gas is used in the industrial sector (for power and heat supply, or in chemical processes), followed by private households (mostly heating and cooking), public power and heating supply, manufacturing and trade. The lion's share of gas is burned to produce heat, and only a fraction is used to produce electricity.  

Gas burning accounted for 15.3% of German electricity generation last year, according to BDEW, the German federal association of energy and water management. In heating, gas keeps half of Germany's 41.5mn households warm. In manufacturing some industries are entirely dependent on gas, where it is both a fuel and a feedstock.

While Germany is successfully transitioning to green energy, because of the government decision to decommission its NPPs in the short term, gas use is expected to increase, to take up the extra load. Germany had closed NPPs by the end of 2021 with a total capacity of 4.1 GW – a significant amount of capacity that needs to be replaced. This was a decision some say caused last year’s energy crisis in Europe.  

The former German government said that the planned exit from nuclear and coal-fired power generation means that mid-term gas demand will increase. Experts estimate that to replace the missing nuclear capacity Germany requires an additional 3 bcm of gas (30 TWh) per year, or 3% of Germany’s gas demand. The pressure on the government to retain its gas supplies is only enhanced, as to cut these off now would result in a double shortfall from the missing gas and nuclear power supplies arriving at the same time.  



Breaking the Russian gas habit

Germany has made amazing progress in switching to renewables, which at 40% of gross power production are now by far the largest contributor to energy production, but despite the breakneck speed renewables have been growing at, it will still take several more years to increase that share further.

And it will take the rest of the EU even longer. Renewables comprise 34% of the EU average power mix. Only Norway and Iceland have transitioned to 100% renewable power generation, with Albania in third place with 84% and Austria, Sweden, Denmark, Portugal and Latvia all now producing more than half their power from renewables.

The Ukraine war has accelerated the EU’s plans to wean Europe of Russian gas and set a new ambitious target of being gas free by 2025 without resorting to restarting coal-fired power stations or using more gas imports from other suppliers, think-tanks Ember, E3G, Bellona and RAP said at a briefing. They propose accelerating the EU’s “Fit for 55” emission reduction plans and investing into more energy efficiency, heat pumps and similar technology, as well as accelerating plans for more investment into solar and wind.

The proposals follow on from a statement by the EU that it would reduce demand for Russian gas by two thirds before the end of 2022. The new briefing described how it could call a total halt to gas imports by 2025, if there was an “urgent EU-wide commitment” to making the necessary changes. The think-tanks, following the lead of the IEA earlier in March, drafted a 10-point plan to end imports of Russian gas by 2025.

If the EU follows through on its plan to reduce Russian gas demand by two thirds, that would leave a total of 51 bcm of Russian gas imports to cover, which the think-tanks believe can be met by existing resources.

“Net imports of fossil gas are projected to reduce by 32 bcm from 2020 levels by 2025 with the full implementation of the “Fit for 55” policy package (MIX scenario). We find that this can be further decreased by 69 bcm through clean and efficiency solutions,” Ember said in its report.

Renewable energy sources, predominantly wind and solar, are critical to weaning the EU off Russian gas and fossil fuels, according to Ember. The current Fit for 55 target for wind and solar capacity by 2025 is 533 GW (229 GW above 2020 levels).

“We have identified that this can be increased by 158 GW to 691 GW by 2025. This equates to 31 bcm of reduced fossil gas demand, 20% of Russian imports. Accelerated solar deployment is responsible for this substantial gain. Solar Power Europe has stated that permitting is key to enabling the necessary huge uptick in solar installations,” Ember said. “Our scenario also assumes wind capacity hits the target set out in the “Fit for 55” proposal; however, deployment is currently lagging, and this must be addressed by the EU as a matter of urgency.”

DATACRUNCH: Sanctions by the numbers – gas, Russia, Ukraine, Ukraine war, Russia, Ukraine war, bne, Emerging Markets, sanctions, bne, ONGT, natgas