To deepen sanctions on Russia, the United States and the United Kingdom announced an embargo on Russian energy imports. The European Union, which relies heavily on Russian energy, aims to reduce Russian energy imports by two-thirds this year.
President Joe Biden of the United States has authorized a restriction on Russian oil and natural gas imports, which he described as “yet another powerful blow” to Putin. Almost simultaneously, British officials stated that imports of Russian oil and petroleum products will be gradually phased out until the end of the year, or until zero.
The European Union, which imports 45 percent of its natural gas, coal, and crude oil from Russia, is finding it tough to forego Russian energy for the time being. Despite the fact that it cannot keep up with the United States and the United Kingdom, the European Union is working hard to cut Russian natural gas imports by three points, or two, this year.
The phase-out of Russian gas must take place in three stages:
- Other suppliers: Russia needs to be replaced with “more dependable” providers. The major source of liquefied natural gas will be the United States, Qatar, and Australia, among others. In addition, pipeline gas from Norway and North Africa will be used.
- More green energy: In order to transform black energy to green energy, substantial investments in renewable energy sources such as solar, wind, and hydrogen are required.
- Better and more efficient use of energy: Energy must be used more effectively. Renovations of buildings and the application of artificial intelligence to optimize energy systems are examples of this.
On February 22nd, as Russian tanks prepared to enter Ukraine, Germany put a hold on final approval of Nord Stream 2, a contentious new gas pipeline connecting the two countries. Chancellor Olaf Scholz promised “to shift direction in order to eliminate our import reliance” with additional renewables, larger local gas and coal storage, and renewed plans for LNG facilities a few days later.
At the EU level, a broad proposal to ensure the bloc’s “energy independence,” which was supposed to be unveiled on March 2nd but was postponed due to the war, is expected to advocate for strategic stocks and mandatory gas storage in the short term to deal with the Russia risk, and a dramatic expansion of renewable energy and clean technologies such as hydrogen in the long run.
That would represent a significant departure in EU energy policy, which formerly focused only on preserving the competitiveness of energy markets. However, if Europe is to break its reliance on Russian gas, monetary and environmental compromises may be essential.
Begin with a short-term goal. Last month, the commission’s head, Ursula von der Leyen, stated that the EU would be able to endure this winter even if Russia’s gas supply was completely disrupted. In the event that emergency supplies are required, the EU has received assurances from Japan, Qatar, South Korea, and other partners. They might also use “cushion gas,” a layer of storage that aren’t generally intended for consumption.
The prognosis dims in the medium run. Every year, Europe imports roughly 400 billion cubic meters of gas. Beyond 2022, replacing the 175 billion to 200 billion dollars it receives from Russia with a mix of alternate suppliers and lower gas usage will be “extremely difficult.” Preparing for next winter will be tough if we stumble into spring with severely reduced stockpiles.
To make problems worse, much of Europe’s regasification capacity is concentrated on the continent’s western shores, in Spain, France, and the United Kingdom. Trans-border gas connections and “reverse-flow” capabilities are better than they were a decade ago, but they are still in short supply. Given these supply limits, European consumption might drop by 10-15% next winter to deal with a Russian cut-off.
Over the long haul. In the mid-2020s, Shell, a British energy behemoth, predicts a gap between worldwide gas production and demand. Because of the ways it has discouraged gas investment, Europe will be hit more than the rest of the world. When there’s a shortage, relying on spot markets draws short-term supplies, but it doesn’t give a clear signal regarding longer-term supply.
When it comes to alternative energy sources, EU member states speak at cross purposes, just as they do when it comes to gas. While Germany is decommissioning its nuclear fleet, France and the Netherlands are looking to grow theirs. Spain will phase out coal by 2030, while Poland will still rely on coal for more than half of its electricity. This muddled approach makes it more difficult to achieve the common aim of abandoning Russian gas.
Even if Europe were to succeed in making the transition to renewable energy, it would still require gas to heat homes and businesses. Some applications, such as high-temperature heat in industrial operations, are difficult to replace with green power. According to one estimate, just 40% of Europe’s industrial gas utilization is in low-temperature, easily electrified applications.
Hydrogen may one day be used to power automobiles, generate electricity, and provide long-term energy storage, among other things. Even with the technology’s boosters, realizing the hydrogen goal will take a decade or more.
So, how about Russia?
Russia can afford to limit gas supply because it makes five times as much from oil exports as it does from gas, and it has $630 billion in foreign reserves. Despite this, Russia is “very unlikely” to restrict gas supply to Gazprom’s main European clients.
Due to a lack of pipeline infrastructure, Russia cannot easily transfer its gas supplies to China. Most gas transit pipelines do not travel through the Donbas region, which is at the heart of the crisis in south-eastern Ukraine, because of the danger of supply being disrupted by violence.
Gas pipelines passing through Ukraine, meanwhile, may be affected if the conflict worsens. However, some of Russia’s gas supplies to Europe may be diverted to other pipelines. It’s also worth mentioning that Russia has been lowering the amount of gas it sends to Europe for months, restricting shipments to the amounts required by contract.
Despite the fact that Europe remains Russia’s primary energy export destination, the country is increasingly turning to China for energy and broader economic cooperation. China might provide an economic lifeline to Russia by purchasing more electricity from it, for example, to help it weather the sanctions storm.
According to a Russian Ministry of Energy official, Russia intends to raise coal shipments to China to 100 million tonnes.
What about bills for consumers?
Energy markets and bills are being impacted by the crisis. After Russia’s invasion of Ukraine sparked new concerns about global energy supply, European gas prices soared by about 70%, while crude oil rose above $105 a barrel for the first time since 2014.
Brent crude, the benchmark against which most other crude grades are traded, briefly rose 9% to $105.79 per barrel on news of the invasion.
Brent prices, on the other hand, settled at $99.08 a barrel after US Vice President Joe Biden announced that his new sanctions on Russia will target the financial sector rather than the oil sector.
With rising tensions over Russia’s threat to Ukraine, there has been worry about how this may aggravate the ongoing energy crisis and affect consumers worldwide.
When the energy price ceiling is increased on April 1st, up to 22 million families in the UK may experience a 54 percent increase in their energy bills, from £1,277 to £1,971.
If wholesale costs continue high following the Russian invasion, the energy price ceiling may reach £3,238 when it is next amended this autumn. By limiting gas shipments and raising wholesale prices, Russia may “weaponize” its resources.
