Business

‘There’s nothing else out there’: Why Europe is addicted to Russian gas

As outrage over the war in Ukraine mounts, European leaders are under mounting pressure to expand sanctions on Russia and end the EU’s decades-long dependence on the country’s oil and gas once and for all.

But an analysis of the top 10 global producers shows how difficult that would be remove russian gas from the European energy mix without imposing severe restrictions on industrial consumption that could slow down economic growth.

The EU imports about 30 percent of its oil and 40 percent of its gas from Russia, and pays Moscow about $850 million a day at current prices to keep the hydrocarbons flowing. Weaning Europe off Russian oil would be a challenge. Getting rid of Russian gas is becoming more difficult.

Gazprom, Russia’s largest gas producer and monopoly exporter, dominates the global gas market. According to consulting firm Wood Mackenzie, it produced 540 billion cubic meters last year, more than BP, Shell, Chevron, ExxonMobil and Saudi Aramco combined.

Of this, 331 billion cubic meters were consumed in Russia and 168 billion were sent to Europe.

Giles Farrer, head of gas research at Wood Mackenzie, said it was “impossible” to replace that volume as production at most gas projects around the world was already running at near peak levels. “There’s nothing else out there.”

Unlike the oil industry, where major producers like Saudi Arabia have historically held back additional capacity to balance the market in the event of a global supply disruption, the gas industry has tended to operate at or near capacity.

Gas is also less fungible than oil because transporting it from the point of production to the point of consumption requires a pipeline or liquefaction plant and therefore a larger upfront investment, Farrer said.

As a result, countries with significant gas reserves like Russia have tended to develop large domestic markets before building up export capacity.

Iran’s national oil company, the largest gas producer after Gazprom, produced 291 billion cubic meters in 2021. But 280 billion of that was consumed in Iran, according to Wood Mackenzie.

Easing sanctions on Iran in the event of a nuclear deal could reopen the possibility of wider international access to Iranian gas, but would require new export facilities that would take years to build.

A man fills a gas bottle at a gas station in Stefan Voda, Moldova
A man fills a gas bottle at a gas station in Stefan Voda, Moldova. The EU imports about 40% of its gas from Russia © Dumitru Doru/EPA-EFE

Apart from Russia, the only suppliers of pipeline gas to Europe are Norway, Azerbaijan, Libya and Algeria, where state-owned Sonatrach sent 34 billion cubic meters of pipeline to Spain and Italy last year.

Algeria could increase that supply if it can resolve a diplomatic row with Morocco, which has been blocking one of its routes to Spain since November, but it would first need to ramp up production and meet growing domestic demand, according to James Waddell, head of European Gas at Energy Aspects Advisory .

“If they can produce the gas and it is not consumed domestically in Algeria, there is spare export capacity,” he said. “The problem is rapidly raising upstream in Algeria.”

The Oxford Institute for Energy Studies estimates that Norway could increase its exports by up to 5 billion cubic meters and Azerbaijan by up to 3 billion cubic meters.

The lack of alternative sources of pipeline gas sufficient to offset a drop in Russian flows leaves Europe little choice but to dramatically increase LNG imports.

LNG – subcooled and condensed natural gas – can be transported by ship and therefore does not require a pipeline. According to Bernstein Research, replacing all of Russia’s line gas to Europe would require 112 million tons of LNG per year, which is nearly a third of today’s global LNG market.

While Europe is looking to reduce its gas consumption by investing in renewable energy and energy efficiency, and as such is unlikely to need to replace all current flows from Russia, significantly more LNG is needed, with the majority expected to come from the US.

“The hope is US LNG,” Waddell said. As the world’s third largest LNG exporter after Australia and Qatar, the US has already announced that it will help the EU secure an additional 15 billion cubic meters of LNG in 2022 and more in the future, without specifying how much is coming from the US and how much is coming from other countries.

In response to rising European demand, Bernstein expects US producers to approve new projects that will exceed US LNG export capacity from 71 million tons (about 105 billion cubic meters) in 2021 to more than 200 million tons per year by 2030 by far the largest LNG exporter could double.

The next major gas project to be completed by then is the expansion of QatarEnergy’s North Field, the first phase of which is scheduled to start production in 2025, taking the Gulf nation’s LNG export capacity to about 100 million tonnes per year by the end of 2026.

State-owned QatarEnergy produced 110 billion cubic meters of gas last year, of which 24 billion was consumed in Qatar and 86 billion converted into LNG for export.

Among the seven Western supermajors, UK-listed Shell was the top gas producer last year, extracting 103 billion cubic meters from gas projects around the world, of which 44 billion was converted to LNG, according to Wood Mackenzie.

LNG is at the heart of Shell’s strategy. Record prices helped the company’s integrated gas division generate 63 percent of the group’s $6.4 billion revenue in the fourth quarter of 2021.

But any investment in new production – which would be required by the industry to offset the loss of Russian supplies – is difficult for publicly traded energy companies to approve when it could take at least 15 years to pay back, Wood Mackenzie’s Farrer said.

“The international oil majors have all accelerated their energy transition ambitions, so an LNG investment must meet these criteria,” he added. “It has to pay for itself relatively quickly.”

Unlike the oil market, where analysts expect some countries to continue buying Russian crude, leading to partial trade diversion that is helping to ease supply shortages in Europe, Russian gas flows cannot be diverted in the same way will.

According to Wood Mackenzie, in 2021 Gazprom piped about 10 billion cubic meters to China via the Power of Siberia pipeline. Moscow and Beijing have signed agreements to increase this flow, but the gas fields in eastern Russia that supply China are not connected to the western fields that supply Europe.

Whether or not formal sanctions are imposed on gas exports, Energy Aspects expects Russian supplies to Europe to fall by at least 21 billion cubic meters this year if long-term contracts that expire in 2022 are not renewed.

The lack of alternative sources of supply means Europe must reduce consumption, either by households or industry, to balance supply and demand, Waddell said.

“The one that is technically feasible and tastiest is to remove them from the industry,” he added. “That means huge GDP cuts, job losses instead of letting people freeze in the winter.”

Twice weekly newsletter

Energy is the world’s essential business and Energy Source is your newsletter. Every Tuesday and Thursday, Energy Source brings you breaking news, trend-setting analysis, and insider information straight to your inbox. Login here.

https://www.ft.com/content/20987a87-1b87-4f45-ab00-722f9ddcd2eb ‘There’s nothing else out there’: Why Europe is addicted to Russian gas

Adam Bradshaw

TheHitc is an automatic aggregator of the all world’s media. In each content, the hyperlink to the primary source is specified. All trademarks belong to their rightful owners, all materials to their authors. If you are the owner of the content and do not want us to publish your materials, please contact us by email – admin@thehitc.com. The content will be deleted within 24 hours.

Related Articles

Back to top button