Geopolitical political crisis has always been at the forefront of catapulting energy prices to unprecedented levels, with natural gas spot price trading at $4.951, nearly 250% above the 2020 price levels. Europe’s energy crisis conundrum is no exception as Russia and Ukraine heard for a clash at the latter’s northern border. The energy relationship between Europe and Russia is simply complicated, involving third part countries. The Euro Area acquires 48% of its natural gas from Russia via various pipelines. The fact that the EU is broadly energy dependent on Russia means that Russia has control over prices and can manipulate the market to suit its price requirements.
The majority of Russia’s gas is transported into the EU via a pipeline which runs through Ukraine, the Ukraine Transit. Ukraine earns a massive €1.8 Billion every fiscal year in “transit fees”. The ongoing Russia-Ukraine border crisis has resulted in unprecedented high energy prices induced by supply bottlenecks coupled with high winter energy demand in Europe. Despite Ukraine’s importance in the supply chain, Russia has 3 other supply channels which are namely the Nord Stream 1, Yamal (via Poland) a 2000km pipeline carrying 33 billion cubic metres of gas each year and the Turkstream (via Turkey). The Nord Stream 1 is currently carrying approximately 1200 million cubic metres, and it slashes down the transit fees incurred by Russia since this pipeline passes through the Baltic Sea.
Its not sufficient to reference Russia’s gas without mentioning Gazprom, the energy giant of the former Soviet Union. Gazprom bears monopoly powers over Russia’s natural gas supplies to the EU and that is set to remain the same into the foreseeable future. Therefore, the covet behaviour of Gazprom in manipulating specific supply routes and storage facilities is a comprehensive highlight of how the EU is exposed to Russia’s energy muscle. From upstream facilities to down to storage facilities even in the Euro Area, Gazprom is the energy giant to contend with.
It’s no surprise that Gazprom owns the majority of equity stakes in a plethora of storage facilities in the European Union. In Germany, the largest economy in the EU with GDP equivalent to $4.3 Trillion, there is the Jemgum, Rehden and Katharina storage facilities in which Gazprom has a controlling stake. No wonder 26 million Germany citizens depend on gas from Russia in order to warm up their homes during winter. Then there is the Haidach gas facility in Austria as well as the Damborice facility situated in the Czech Republic. Hence the reach of Gazprom is not to be underestimated, putting the energy requirements of EU households at the clemency of Russia.
A crucial geopolitical card being engaged on by Russia is the Nord Stream 2 pipeline, and this has attracted the attention of the United States. The 1200 km (745 miles) gas pipeline stretches from Russia’s Baltic coast (Ust-Luga) to north-eastern Germany (Greifswald) with an incredible carrying capacity of 55bcm of gas per year, once it has been completed. The €10 Billion project is Russia’s latest bid to bypass Ukraine and minimise “transit fees” incurred in transporting its gas via foreign territories. On the 10th of September 2021, Gazprom indicated the NS2 was ready for use. However, the U.S. bears the fear that the NS2 will undeniably make Germany and the EU more energy dependent on Russia at expense of Texas gas exports. Political dynamics are being included in utterances against the NS2, U.S. officials are inclined towards concluding that the NS2 will also be used to manipulate EU internal policies, a distress call which holds water in the face of the current energy crisis.
Outside of Russia’s 48%, the EU imports 28% of its gas requirements from Norway, followed by 9% coming from Africa, chiefly from Algeria, Libya supplying a meagre 1%. The remaining 18% is imported in the form of Liquefied Natural Gas (LNG) from U.S. (the world’s largest LNG producer), Australia and Azerbaijan. Qatar is coming onboard as a scanty alternative to Russian supplies. After the energy crisis of 2000 and 2009, then the 2013-2014 Ukraine crisis, the EU pursued a policy of reducing its depends on Russian gas but have failed to make significant process, with Russia still supplying a comfortable majority of the EU gas imports. The EU total gas import in 2021 amounted to €36.5 Billion of which €17.52 Billion being pocketed by the Russian energy monopoly, Gazprom.
In the face of the failing supply substitution policy, U.S.-EU policy considerations are inclining towards a permanent transition from gas dependency through demand-side adjustments rather than seeking alternative supply sources. This is backed by the fact that most alternative suppliers are already operating at near full capacity, escalating the risk of sky rocketing prices in the face of a supply shut down by Russia. Norway (the largest gas supplier to the EU) has officially announced that it cannot go beyond its current supply capacity, leaving Qatar as the only supplier with marginal capacity but not sufficient to replace the entire Gazprom supplies.
As the Russian-Ukraine remains on an escalatory path, NATO and the EU have threatened Russia with severe economic sanctions which might include the suspension of the NS2. The NS2 is the key trump card in the EU’s helpless hands, sanctioning the NS2 will reduce exports revenue for Russia but will undeniably backfire, since there is limited alternative supply options available to the EU. Such a move will likely push natural gas spot prices towards $14.300, peak prices reached during the 2006 and 2009 Russia-Ukraine-Europe gas crisis.
“Cost push inflation” has already accelerated to decades high, U.S. 5%, UK and EA 5.1%, and likely to reach 6% if energy prices remain stubbornly high as the year progress. The Northern winter is now subsiding, slowing down the demand for gas but the reduced demand will not be able to counter restricted supplies. The Federal Reserve and the European Central Bank have indicated their respective intentions to raise interest rates to counteract inflation, but that does not resolve the underlying supply side restrictions.
