The EU's long goodbye to Russian gas

Russia's role in the global energy economy historically has been immense, especially in Europe.

It is the largest natural gas exporter in the world, and the second-largest crude oil exporter after Saudi Arabia.

As Russia's war in Ukraine continues to cloud the outlook for the critical energy feedstocks, the European Union is seeing success in spot-filling its needs from elsewhere.

And the demand destruction occurring with Russia will be permanent, according to industry analysts.

"Because the price of gas went up so much last year, we really saw natural gas backed out of the power sector," Graham Freedman, principal analyst for European gas for Edinburgh, Scotland-based Wood Mackenzie, told Rubber News March 10. "Most big industries had to close. Companies like BASF began switching production from the EU to the U.S.

"Expect to see some demand destruction going on for the next few years as a result of what has happened (with the war in Ukraine). And this will be permanent demand destruction."

While pricing has eased somewhat for natural gas early in 2023, falling from about $69.60 per million metric BTUs in August 2022 to between $13 and $15 per million metric BTUs today, the commodity continues to generate a relatively high price.

Comparatively, natural gas in the U.S. costs between $2 and $3 per million metric BTUs, according to Wood Mackenzie.

"Europe has a history of high dependency on Russia for its energy and petrochemical needs," Karan Chechi, a director at India-based ChemAnalyst, told Rubber News. "However, Europe has significantly reduced its dependency from Russia for natural gas as well as crude oil since the start of the Russia-Ukraine war ... and the consequent packages of sanctions."

As early as the last quarter of 2021, Europe had been meeting almost half of its energy needs via imports from Russia—not including the U.K., which uses very little Russian NG—and the supply that had been status quo for decades remained firm until the end of 2021.

In 2021, the EU imported around 44.8 percent (a yearly average; other firms, like Wood Mackenzie, have reported slightly different percentages) of its total natural gas from Russia, which in 2022 deteriorated sharply to 23.6 percent (yearly average).

In fact, the percentage of natural gas that Europe used fell precipitously from 29 percent to 13 percent in 2022 alone, due in part to sabotage and sanctions, yes, but also to risk-averse alternate sourcing, Chechi said.

The EU is attempting to reduce its dependency on Russia's other major fossil fuel, crude oil, mirroring the about-face with natural gas. Oil saw a reduction of between 9 and 12 percent between 2021 and 2022.

The imports of petroleum products, which had been at about 9.5 million metric tons (monthly average for 2021 and earlier), fell to 8.6 million metric tons (monthly average, until October 2022), according to Chechi.

But with all of the concern a year ago about EU natural gas supply making it through the winter, the 27-country union has been remarkably resourceful in maintaining domestic reserves.

"The pledge of penalizing Russia by trade and reducing its reliance (on Russia) for petrochemicals, the EU has looked for new import routes and ended up being successful in doing so," Chechi said. "We have estimated that the EU is almost at 50 to 60 percent of its total inventory level, assuming it is not getting refilled, this may last the next five to six months."

Chechi noted that this is only an estimate, as results can vary with the changing requirements of energy from households. Operating capacities for NG in Europe include Norway (120 billion cubic meters), Netherlands (78 bcm), United Kingdom (46 bcm), Romania (11 bcm), Denmark (6 bcm), Poland (4 bcm) and Germany (5 bcm).

On the demand side, bringing back some mothballed coal capacity and slowing their phaseouts, coupled with delaying maintenance shutdowns at nuclear plants, could free up some gas in the power sector in the EU, perhaps as much as 13 bcm, according to Freedman.

"But not everyone can bring back coal," he said.

In addition, increased use of coal in Europe and Asia could be limited if sanctions on Russian coal—imposed by the U.K., EU and U.S. last year—continue. There is limited global supply to substitute high-grade coal from Russia, according to industry analysts.

"The EU Commission has been clear about wanting to move away from Russian gas, for all practical reasons," Freedman said. "We will not be seeing a return to Russian supply, as it will now swing to the U.S. A lot of U.S. natural gas will now end up in Europe."

So who else is filling the gaps for the EU, especially as natural gas is concerned?

"The EU continues to shift its dependency from Russia to other nations, including the U.S., Nigeria and Qatar," Chechi said.

Together, the three countries represent about 25.7 percent of total EU imports of natural gas today, Chechi said.

Norway, at 25 percent, and Algeria, at 11.6 percent, round out the largest, most recent percentages of EU LNG spot imports.

On the other side, imports of LNG from Russia were cut in half in 2021 and by 75 percent last year in the EU.

Freedman noted that the premium price available in Europe—witness what the German government has been paying—has been pushing LNG into Europe to the detriment of Asian suppliers.

"In general, with what happened between Russia and the Ukraine, there effectively was a price shock in the market," Freedman said. "We are beginning to see some return to normality, albeit a constrained normality.

"You can't replace Russian gas overnight. This is a huge swing in just a two-year period, and the impact on the chemical market has been quite dramatic. It is going to take a few years for the infrastructure to be developed. Then we can get back to a more normal supply-demand balance."

Freedman said a number of additional U.S. energy plants are expected to come onstream in the 2025-26 timeframe. Qatar, as well, has "huge potential" for additional capacity.

"These are two key resources for global supply," he said. "The Norwegians have also stepped up supply, maintaining at pretty high rates."

Norway typically uses a process whereby they reinject gas into their oil fields to refill them.

"But the price has gone up so much, rather than reinjecting, they are exporting," Freedman said. "And they will continue to do this as prices stay high."

Clearly a forecast is just that—an educated guess at market trends.

After the recent 10th package of sanctions on Russia, the EU has banned all imports of synthetic rubbers and carbon blacks, which will create a supply imbalance across the European market. The ban, however, doesn't take effect on those materials until July 2, 2024.

"Russia was one of the major suppliers of butadiene rubbers and carbon black, and this recent ban will induce a market shift from Russia to Asia," Chechi said.

Meanwhile, Russia is shifting its exports to major Asian economies like India and China.

"After supplies to the EU plummeted, China has become a new favorite destination for Russian natural gas supplies," Chechi said.

Russian natural gas major Gazprom aims to invest in delivery capacity to China and add 100 billion cubic meters to the country by 2030.

Power of Siberia 1 also will look to arrive at full capacity of 38 billion cubic meters to China by 2025, which currently is working at 10 billion cubic meters, Chechi said.

On the other side, India has become a key destination for Russian crude oil. India imported around 27 percent of its total January 2023 imports, due to its cheaper value and strong diplomatic ties with Russia.

However, Russian material always had the advantage of cost efficiency, which, for a very long time, was of great benefit to Europe's automotive industry.

And now, as Freedman said, there is a true finality to Russia's imported products.

"Something to think about are the risks to forecast," he said. "Clearly there are other things that could happen in the meantime that could get forecasts wrong.

"The war could escalate—there is gas transit still going on through Ukraine, which I find completely strange, but it is still happening—and this (pipeline) could stop and stop quite quickly."

Sabotage remains a possibility, something that experts already believe occurred at Nord Stream 1, the major pipeline connecting Russia and Germany for natural gas supply.

"Since August 2022, Nord Stream 1 has been under sabotage," Chechi said. "Further, Nord Stream currently has two pipelines (NS1 and NS2) ... and Nord Stream 2 has not come into service despite being completed in September 2021."

Freedman noted that most NG supply enters the EU via southern routes.

"Most of the supply into the EU is coming in via Turkey, which is taking Russian gas per its contracts," Freedman said.

Turkey continues to have its Russian gas delivered almost unaltered, though the price has been high.

As the EU is on the road to clean energy, it will look to phase out coal by 2030 and gas by 2035, shifting to cleaner and cheaper alternatives like solar and wind power—and away from Russian energy supplies.

In addition, green hydrogen is expected to be a viable energy source in the coming years in the EU, and is expected to result in the further decline of fossil fuels in the region.

"We believe that shifting from fossil fuels to cleaner alternatives like solar and wind is the most feasible decision for the region," Chechi said. "However, the region must bear the burden of high capital investments in this case."

With "more potential risks in forecasting the global energy market than at any time in recent history," Freedman said, any suggested outlook should be taken with a grain of salt.

"Expect the unexpected," he said.