EU ban on Russian LNG could backfire

EU ban on Russian LNG could backfire
/ bne IntelliNews
By bne IntelliNews April 13, 2023

Momentum is building behind calls for the EU to impose a ban on Russian LNG, even though doing so could make it harder for the bloc to stock up on gas supplies before next winter.

The EU has already placed embargoes on Russian oil and petroleum products, while Moscow has drastically cut pipeline gas supplies to Europe over the past year to put political pressure on the West to make concessions in the Ukrainian crisis. However, Russian LNG supplies to Europe have not only continued but have soared. While Russian pipeline gas to Europe is now at only 10-15% of its pre-war level, Russian LNG imports into the EU soared 31% in 2022 to 19.2bn cubic metres.

However, in recent months and weeks, there are increasing calls by member states to target Russian LNG as well. EU countries agreed to explore a legal avenue in late March to prevent Russian companies from sending LNG to member states by stopping them booking infrastructure capacity. The European Commission has welcomed these calls, with caution.

“We can and should get rid of Russian gas completely as soon as possible, still keeping in mind our security of supply,” EU Energy Commissioner Kadri Simson told EU lawmakers in early March. “I encourage all member states and all companies to stop buying Russian LNG, and not to sign any new gas contracts with Russia once the existing contracts have expired.”

By targeting Russian LNG imports, the EU would be targeting a key source of Russian revenue. Analysts at CapraView estimate that nearly half of the LNG Russia exported in the first ten months after the invasion of Ukraine went to the European market, representing around $14bn in revenue.

However, an embargo on Russian LNG could well backfire.


Not out of the woods

Fortunately, Europe enjoyed an unusual warm 2022-23 winter. That, as well as ample global LNG supply and legislation introduced by Brussels to cut demand and fill up gas storage facilities, spared the bloc from gas shortages and power blackouts that had been feared. European gas prices have fallen back to the pre-war level, despite Russian pipeline gas flow remaining at a record low.

However, as International Energy Agency (IEA) head Fatih Birol recently warned, “we are not out of the woods yet,” with global gas markets expected to remain very tight throughout this year. Several key factors would plunge the European market into instability once more, including a full shutdown of pipeline gas flow by Russia and resurgent demand in China following the lifting of COVID restrictions, Birol said. There might also be further unforeseen outages at LNG plants, such as the one at the Freeport LNG terminal last year in Texas following an explosion. This coming summer could be very hot, driving up power demand, and the next winter could be very cold, increasing heating consumption.


Limited impact on Russian government revenue

First, it is important to note that while an embargo on Russian LNG may affect the revenues of Russia’s Novatek, operator of the Yamal LNG plant, there would not be a significant impact on the revenues of the Russian government. Yamal LNG does not pay export duty or mineral extraction tax to the government, although it does pay a 34% profit tax. As reported by Reuters this month, Novatek has even requested that the government defer an additional profit tax for 2022 and cut its tax.

The impact of blocking Russian LNG imports might be limited if there was a “perfect swap,” where the Russian LNG that did flow to Europe all heads to Asia instead, Anne-Sophie Corbeau, expert with the Center on Global Energy Policy at Columbia University, explains. In this case, Asian buyers would cut down on imports from other suppliers, and those suppliers would in turn send more to Europe.

In this scenario, “as Yamal LNG is closer to Europe than to Asia, this tightens the global shipping market during the winter season due to longer shipping routes to Asia when the northern route is unavailable,” Corbeau explains. “It also affects the transshipment of Russian LNG from nuclear icebreakers, which typically takes place in Belgium and France. The impact on gas prices is limited.”

Alternatively the match might not be so perfect, and as Chinese LNG demand rises, that country’s buyers will compete with European companies.


Russian retaliation

As was the case when Europe declared that it would end reliance on Russian energy, the other risk is that the Kremlin retaliates. Moscow had no qualms about significantly cutting gas supply to European buyers following the invasion of Ukraine – first by forcing customers to pay for gas in rubles, and then by restricting gas flow via the Nord Stream pipelines. Russia could cut off the remaining pipeline gas flow, which still amounts to around 20 bcm per year. In such a tight market, this would have a significant impact on gas prices.

Whether or not the EU targets Russian LNG, Moscow may decide to cut gas flow anyway, and so that EU should focus on further preparedness, as it has done by extending the 15% gas demand reduction target against a five-year average until March 2024.

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