Europe unlikely to tackle Russian LNG imports anytime soon

Europe unlikely to tackle Russian LNG imports anytime soon
It's Europe's dirty little secret: it remains heavily dependent on Russian imports of LNG and it is not about to cut off those supplies any time soon. / bne IntelliNews
By Newsbase April 23, 2024

Even if key importers block Russian LNG, the impact on the Kremlin’s finances may be limited, given the tax breaks it has given to LNG projects to support the sector’s expansion.

WHAT: The European Parliament has voted in favour of rules to allow individual EU member states to block Russian LNG imports.

WHY: The move is aimed at further curtailing Moscow’s revenues from energy exports.

WHAT NEXT: None of the major importers of Russian LNG in Europe have signalled they are ready to take such a step, but their positions could shift as the global market receives greater supply over the coming years.


The European Parliament voted in favour of rules earlier this month that would enable individual EU member states to block Russian LNG imports, by preventing Russian companies from booking capacity at gas infrastructure. 

Through this legislation, EU authorities are demonstrating their commitment to phasing out remaining Russian energy imports. But beyond optics, it is doubtful that the move will have any meaningful impact on Russian LNG flow in the near future, as none of the major European importers of Russian LNG – Spain, France and Belgium – have indicated they will implement the rules. What is more, even if those countries were to ban imports, the impact on the Kremlin’s finances may be limited, given the lavish tax breaks that Russia has awarded to LNG projects to support the sector’s expansion.

Russian pipeline gas supplies to Europe slumped to their lowest level in decades last year to only 25.9bn cubic metres, versus more than 170 bcm in 2019, as the Kremlin cut supply to put pressure on EU leaders to withdraw support for Ukraine. The EU then introduced embargos on most Russian crude oil and petroleum product imports in late 2022 and early 2023.

However, neither side has tampered with Russian LNG. Supplies have in fact soared since Moscow’s invasion of Ukraine, with the EU taking 22 bcm in 2023, up from around 16 bcm in 2021.


Tax breaks

The Russian government earns significant revenue from the oil, petroleum product and pipeline natural gas it exports, primarily in the form of export duty, mineral extraction tax (MET) and dividends from state-owned companies. It has even increased this tax burden over the last two years to offset the impact on the budget of war costs and sanctions. In total, Russia expects to earn RUB11.5 trillion ($123bn) in oil and gas budget revenues this year, marking a 30% increase year/year.

However, LNG exports contribute a very small share of these revenues. This is because Moscow granted new projects significant tax breaks to support their development. Novatek’s flagship 17.5mn tonne-per-year Yamal LNG terminal – which would be primarily affected by EU bans – is exempt from mineral extraction tax (MET), export duties and property tax. It used to enjoy a reduced rate of profit tax but this was raised to the standard 34% last year. The same level of support has been provided to other new projects including Novatek’s 20mn-tpy Arctic LNG-2. Gazprom’s Sakhalin LNG terminal in the Far East does not have these tax breaks, but it ships practically all of its gas to Asian markets and so would not be affected by the ban.

In contrast, Gazprom pays 30% of the price for its pipeline gas in Europe in export duty. The company was also hit hard by an increase in MET last year, with the government looking to raise an extra RUB4.7 trillion in MET on gas production between 2024 and 2026. This is on top of trillions of rubles in windfall taxes that the company had to pay in 2022.

What is more, whereas Gazprom, Russia’s premiere pipeline gas exporter, is more than 50%-owned by the state, Yamal LNG’s owner Novatek is privately-owned, save for a 9.4% stake owned by Gazprom. That means that the Russian state receives very little from European LNG exports in the form of dividends.


Major importers reluctant to use the powers

The European Parliament voted through a new gas package on April 11 designed to accelerate the use of renewable and low-carbon gases, which also gave member states the power to restrict Russian LNG as well as pipeline gas imports at a national level. Member states would be able to temporarily limit bidding for capacity in natural gas grids and LNG import terminals at entry points from both Russia and Belarus.

A reinforced majority of EU countries would need to approve the policy before it takes effect, but it is expected to pass without changes. However, member states would then need to follow various requirements before limiting bidding for deliveries from Russia. They are requested to take into account the impact on the EU’s security of supply and they should also consult with the affected member states and third parties, and the European Commission, before applying any limitations.

“Member states should take due account of potential effects of their measure on other Member States and in particular respect the principle of energy solidarity, including with a view to ensuring security of supply, when assessing the appropriateness and scope of any envisaged limitation,” the legislative package states.

Neither Spain, France nor Belgium have indicated that they will introduce bans, however. The three countries accounted for 32%, 23% and 13% of total EU imports of Russian LNG respectively last year, and do not want to jeopardise their energy security by restricting this supply. While global gas prices have subsided greatly over the last year and a half, they remain elevated compared with what was typical prior to the energy crisis, and the market remains tight. Spain, France and Belgium are also reluctant to break long-term contracts on Russian LNG supply and transhipment. 

The only states that have so far stated their intention to block Russian LNG imports are those that receive very little of the gas anyway, such as Finland, which plans to do so from next year. Its Russian LNG intake is practically zero. 

Instead of unilaterally banning Russian LNG imports itself, Spain has said that the EU should adopt a tougher stance on the supplies, so that countries can block them without shipments simply being diverted to neighbours.

It is unclear how the policy will work in practice, Spanish Energy Minister Teresa Ribera told Bloomberg in an interview in March.

“We have to ensure the response is effective,” she said. “Please let’s try and coordinate how we react on this, both on the spot market and existing contracts.”

France’s government is also non-committal. It said earlier this year it was assessing whether conditions for implementing a ban could be met, but said this did not seem to be the case. 

Belgium’s energy minister Tinne Van der Straten meanwhile said back in January that it was “not entirely clear if we can work with that,” referring to the option in the EU gas market law.

“We are indeed also in Belgium confronted with specific contracts that were signed well before the war and it is now still an open point how to address this,” she said.  “This is something that we cannot take on unilaterally,” she added, stressing the need for consultations with neighbouring countries.


LNG transhipment

All three countries not only use Russian LNG for their own needs but also re-export significant volumes to other markets. Most of the Russian LNG brought ashore at Belgium’s Zeebrugge terminal is not used in that country, and is instead sold on to other EU countries or transhipped to markets elsewhere in the world. 

Were Belgium to prevent transhipment, this could have a significant impact on Russian LNG exports. While most global LNG exports can easily be redirected to other markets, Yamal LNG needs to use specialised icebreaking LNG carriers that are in short supply to transport its gas out of Arctic waters during most of the year. These carriers offload their cargoes in ports like Zeebrugge, for onward shipment onboard conventional carriers to the final market destination. Preventing transhipment may result in the icebreaking carriers having to make the entire trip themselves, putting a strain on shipping capacity and driving up shipping costs.

For the time being, though, Belgium and the other major importers of Russian LNG in Europe do not seem prepared to block either imports or transhipment volumes. While the worst of the European gas crisis has passed, prices are still around 50% higher than the level before Russia began restricting its pipeline supply to the continent in the summer of 2021. Global LNG supply also remains tight, as limited additional capacity has come on stream in the last two years, despite a record number of final investment decisions (FIDs) on projects.

Even the EU’s energy regulator, ACER, has warned that the bloc still needs Russian LNG to avoid an energy shock. “The reduction of Russian LNG imports should be considered in gradual steps,” the regulator said in a report last week. It also stressed its concern about individual member states restricting supply, noting that doing so could breach long-term supply contracts agreed with Russia prior to its invasion of Ukraine. Companies that break contracts could have to pay hefty fines to Moscow, undermining the goal of depriving the Kremlin of revenue. Some of those contracts also include destination clauses, meaning that buyers cannot simply redirect cargoes to other markets.

As the global supply situation eases up over the next two years, however, both the EU and individual buyers of Russian LNG may feel more emboldened to cut supply where they can. A raft of new liquefaction projects are due on stream in 2025-2027, primarily in the US and Qatar, which will leave Europe with more options to eliminate Russian gas.

This article is from bne IntelliNews’ sister publication NewsBase that covers global energy issues. Sign up for a two week trial here.