The attack on Ukraine and retaliatory sanctions by the EU and the US led to an aggravation of the energy confrontation: the West uses oil and coal in this struggle, minimizing the import of these energy resources from Russia, and the Kremlin uses a gas pipeline, since Russia is not so dependent on natural gas trade (only 20% of all oil and gas revenues come from gas). Horror stories about how Europe will freeze without Russian gas have been floated by Kremlin propaganda for years, but this time the EU really needs to prepare for the worst. Many experts agree that the coming winter will be the biggest energy crisis for Europe. So far, no detailed statistics or roadmap has followed from Brussels with specific decisions on industries and countries, but some forecasts can still be made.
EU: worst case scenario
Until 2022, Russia was the leader among gas suppliers to the EU, with a share of up to 45% of all imports. A little more was supplied to the market only by European companies themselves, which this year are trying to increase gas production (even at the expense of reducing oil production). Against the backdrop of energy shortages caused by interruptions in Russian gas supplies, European regulators are likely to have to choose among consumers whom to support or even “keep alive”.
The European Commission has already adopted an agreement to reduce gas consumption by 15% in the next eight months from 1 August. This should save up to 30 billion cubic meters. m of fuel, to help European countries to pump the necessary amount of gas into underground storage facilities before November 1 and supposedly survive the "average" winter. However, this volume may not be enough for the needs of the EU, especially if the temperatures are abnormally low.
According to the estimates of the International Energy Agency (IEA), even if gas storage facilities are 90% full by winter, with a complete cessation of Russian gas supplies to Europe, there may be a shortage by February. If temperatures in Europe are below normal this winter, European countries will need about 350 million cubic meters of Russian gas per day.
Even if gas storage facilities are 90% full by winter, with a complete cessation of Russian gas supplies to Europe, there may be a shortage by February
Hungary, Slovakia and the Czech Republic, which are located in the interior of the continent, may become the most vulnerable, and Austria, Germany and Italy will feel the negative effect to a lesser extent. The reason for this is that the European gas distribution network was originally built to supply gas from Russia to consumption centers in Central and Western Europe.
Problems may arise due to the fact that countries and companies are not ready to switch between energy sources. Another issue may be the limited capacity to transport gas from alternative sources (eg LNG terminals) through some regional distribution systems.
Obviously, countries that have access to the liquefied natural gas market (mainly the southwest and west of Europe) will be affected to a lesser extent. But LNG prices will also rise in anticipation of winter. There will probably even be a number of poorer countries, such as Pakistan, that will not be able to compete for raw materials and will experience the “rebound” of all the hardships of the energy crisis, although it is located in a very different part of the world.
For some industries (for example, chemical, where gas is used as a raw material for production), supplies are critical, and interruptions can lead to serious losses - up to the closure of enterprises, while in other industries, where gas is needed for energy generation, most likely, ways to reduce the production and consumption of gas.
According to IMF analysts, a complete shutdown of Russian gas supplies across Europe for more than six months would reveal “infrastructure bottlenecks” and thus lead to even higher gas prices and significant shortages in the most vulnerable countries. And this despite the fact that since the beginning of hostilities in Ukraine, the price of gas in Europe has already begun to break records, and the reduction in supplies via Nord Stream 1 to 20% since the end of July has only fueled demand.
Revisiting the Green Agenda
In mid-May, the European Commission presented its strategic response to the energy crisis, the REPowerEU plan . According to him, the EU's dependence on Russian gas should be reduced by 67% already this year, and completely - "long before 2030."
In 2020, the share of renewable energy sources in the EU balance was over 22%. It was originally planned that by 2030 this figure would grow to 40%, but according to REPowerEU, the share should increase to 45%. In particular, the focus will be on the rapidly growing market for solar panels. By 2025, their number should double from the current level - up to 320 GW, and by 2030 it will reach 600 GW.
Green hydrogen will play the leading role in the process of phasing out gas. Moreover, its main advantage is precisely the possibility of its delivery to those very “bottlenecks” of infrastructure in Central Europe. REPowerEU aims to produce 10 million tons of hydrogen within the EU by 2030 and import the same amount.
Wind and hydropower accounted for more than two-thirds of all electricity generated from renewable sources (36% and 33% respectively). The remaining third of electricity comes from solar energy (14%), solid biofuels (8%) and other renewable sources (8%). Solar energy is the fastest growing source, accounting for only 1% of electricity consumed in the EU in 2008.
In particular, the green energy focus will be on solar panels as the fastest growing market.
The second challenge for the EU is to achieve this in line with its ambitious climate goals. Moreover, in many respects, the European Commission expects to accelerate.
The EU countries want to fulfill their plans by saving energy, diversifying energy supplies and accelerating the pace of work in the field of renewable energy sources (RES). In the meantime, the path followed by the European Union proves the priority of the first task over the second.
EU dependence on Russian gas should be reduced by 67% this year
For example, atom and gas, controversial from the point of view of security and carbon footprint , were included in the green "taxonomy of the EU" (the so-called list of projects for investment in accordance with the green strategy of the union) against the backdrop of the energy crisis. This will lead to the fact that investments in these sectors will resume in the perspective of several years, as well as the infrastructure will appear - for the wider use of liquefied natural gas in Europe.
The decision was condemned by eco-activists, but its supporters call for treating nuclear energy and gas as "intermediate" energy resources in the transition to renewable energy. The "greens" are also dissatisfied with the plans of Germany and Belgium to postpone the conservation of their nuclear power plants against the background of the energy crisis. In their opinion, this delays the transition to clean energy sources and leads to inefficient investment in moribund industries.
The embargo on Russian coal will also not lead to a sharp reduction in its consumption in the EU. Before the restrictions, European buyers tried to increase coal supplies in the spring, and also found new importers, such as Kazakhstan, Indonesia, Australia, South Africa and Colombia.
The embargo on Russian coal will not lead to a sharp reduction in its consumption in the EU
But despite these "steps back" and the temporary use of unsustainable fossil fuels for a couple of years, Europe's furious desire to get rid of dependence on Russian gas should accelerate its transition to clean energy. Trying to find a balance between tactical and strategic well-being, the European Commission is now, in fact, choosing: just endure one or two difficult winters or invest more in renewable sources and thereby get into a short and quickly closing window of relative climate well-being.
Not everyone loses
The surge in energy prices is also pushing up the income of suppliers, encouraging them to increase production and exports. For example, this was one of the reasons for the growth of Iran's revenues from the sale of oil and condensate in March-July - by 580%. But perhaps the biggest "premium" in the current situation is received by the United States, and in several areas at once. Oil exports from the United States are breaking historical records (over 4.5 million barrels per day) and, according to analysts, growth may continue.
The situation is the same with liquefied gas: in the first half of 2022, the United States became the largest exporter of LNG in the world, increasing exports to the EU and the UK by 63%. Supply volumes could grow even more if European buyers continue to offer orders of magnitude more for LNG shipments than their Asian competitors. But American gas cannot be an absolute solution for Europe in a crisis, as LNG supplies are limited by the availability of infrastructure.
US oil exports break historical records
Despite the obvious benefits for US hydrocarbon suppliers, in the long term, a slowdown in economic development in the European Union, a key US partner, is hardly among the goals of American foreign policy, and the threat to its political cohesion is even more so. Also, the United States and the European Union are unlikely to be satisfied with the strengthening of the Chinese economy, which actively imports oil from Russia with its huge discount for toxicity, as well as natural gas. It would not come as a surprise if in the future China demands even more preferential price terms from Russia as a key buyer.
As for the second major buyer of Russian oil, India, the question then is whether the US and the UK can and will actually try to bring India into the oil embargo. On the one hand, about 1 million barrels per day. Russian oil will be left without a buyer, on the other hand, it will most likely be China.
The Persian Gulf countries, in particular the UAE, have significantly increased the import of Russian oil products
Middle Eastern exporters, which have lost their leadership in their traditional Asian market, increased supplies to European countries, and also found a new trading niche for themselves - Russian oil products. The countries of the Persian Gulf, in particular the UAE, have significantly increased the import of Russian oil products, especially dark ones, which are used in the shipping industry and for generating electricity. According to the agency Vortexa, the volume of purchases in July was close to 400,000 barrels per day.
In addition, Turkey can be added to the non-obvious beneficiaries-buyers, which actively buys cheaper Russian oil in the Mediterranean and, on the whole, has taken a stable position as a mediator in the conflict between Russia and Ukraine.
And, of course, oil and gas companies around the world themselves are making record profits from the unfolding crisis. UN Secretary-General António Guterres said he considers this state of affairs "immoral".
“The combined profit of the largest energy companies in the first quarter of this year is approaching $100 billion. I call on governments to tax this excess profit and use the funds to support the most vulnerable during these difficult times."
The global energy transition will follow a different scenario
The last five months since the start of the war in Ukraine have already changed the global energy market quite a lot, but the coming changes will be even more noticeable.
As in the aftermath of the 1973 crisis, consumer countries are likely to reconsider their attitude towards energy purchases towards even greater diversification of energy sources and suppliers. In addition, developed countries will try to accelerate the pace of energy transition and decarbonization of the economy, as climate change and even more alarming forecasts push them to do so.
Only the trajectory along which this process will go is questionable. But it is already clear that security will be put at the forefront, and not just economic well-being, as has been the case over the past decades.
On the one hand, this may lead to an increase in centripetal forces in politics and the economy, a slowdown in the process of globalization, and attempts to reduce dependence on suppliers of key goods, especially technologies. But on the other hand, as a result of this process, technologically developed countries will increasingly strengthen their positions, in contrast to resource-supplier countries, and in the long term, technological dominance should ensure more stable prices and energy security.
