Why Russia needs to sell natural gas more than EU needs to buy it
The Russian occupation of Crimea has raised concerns about the European Union’s dependence on its eastern neighbor for natural gas. The EU gets about 34% of its natural gas imports from Russia, a large portion of which transits Ukraine through a web of pipelines. For Eastern Europe, that dependence is much greater. In the brutally cold winter of 2009 Russia cut off gas supplies to Europe allegedly over a pricing dispute with Ukraine. However, it was also a lesson to Western Europe on its dependence on Russia for energy.
Russia has a track record of using its natural gas supplies as a political weapon. The latest incursion into Ukraine has no doubt revived worries among European policymakers that saw what happened back in 2009. Thankfully, Vladimir Putin eased tensions on March 4, indicating that he wasn’t seeking a military conflict. This allowed natural gas prices to fall back a bit after spiking by 10% the day before. (Related Article: Ukraine Refinery Halts Amid Tensions with Russia)
But how vulnerable is Europe to the political machinations of the Kremlin? It appears that this time around the EU is in better shape. A mild winter and stagnant demand have left Europe with higher levels of inventory than in past years. According to a spokeswoman at the European Commission, the EU has 40 billion cubic meters of natural gas on hand in storage, which accounts for 10% of annual demand for the entire European Union. Those figures vary by country (Czech Republic and Slovakia have 90 days of supplies; Hungary two months; Austria six months), but as a bloc, the EU has 20% greater supplies at its disposal than it did last year.
And it’s not just seasonal patterns that have put the EU in a better spot. Europe has been reducing its reliance on Russian gas for a while now – in 2003 the EU imported 45% of its natural gas from Russia. It’s now down to around one-third.
Europe has been the beneficiary of the shale gas boom in the United States, even though the U.S. hasn’t even really begun to export LNG. The surge in domestic production allowed LNG from other parts of the world – Qatar, for example – to be rerouted to Europe. (Several U.S. members of Congress have tried to exploit the Ukrainian crisis, arguing for the Obama administration to issue a blanket approval for LNG exports in order to isolate Russia. Over the short-term, that is nonsense – it will take years to build the terminals, so issuing licenses for exports won’t do anything to help out Europe. Over the longer-term, that may be a different story). Europe has also undergone a big effort at implementing greater energy efficiency and renewable energy. Moreover, the U.S. has exported more coal to the EU in recent years, which competes with high priced natural gas there. (Related Article: Markets in Turmoil on Ukrainian Crisis)
Thus Europe is more secure than many believe. Moreover, the EU and Russia are so interdependent that it is unlikely Russia will proactively cut off gas supplies to Europe. In fact, Russia is arguably more dependent on the EU than the other way around. Europe has other options. Russia, on the other hand, is heavily dependent on oil and gas, which account for half of the country’s total budget revenues. For Putin, cutting off gas exports to Europe would be akin to him cutting off his nose to spite his face.
“It would be highly counterproductive for Russian interests at a time when Europe is considering how to respond to Russian actions in Crimea, to take steps that would have a major and negative direct impact on Europe,” said Laurent Ruseckas, a senior associate at IHS CERA, as reported by Politico.
The economic damage of energy supply disruptions cuts both ways. Putin likes to play the role of bully, but Russia is not exactly in a strong position in terms of using energy as a political weapon. Whether or not the Ukraine crisis deepens, it is unlikely that Moscow would intentionally turn off the taps for any prolonged period of time.
