Europe Is Scrambling to Turn Its Back on Russian Oil and Gas

WHEN THE $11 billion Nord Stream 2 project was announced in 2015, it promised a brave new energy future for Europe. Criss-crossing under the Baltic Sea from western Siberia to make land in Germany, it assured Germany—and the tight-knit European energy market, through which natural gas supplies cross borders with ease—guaranteed supply. 

Nord Stream 2 was built to bypass Ukraine, in a move designed by Russia to add economic pressure to the country following a partial invasion of the country’s east in 2014. Russia’s gas supply contracts through Ukraine are up for renewal in 2024, and Russia seems minded to ditch them, and the supply to the country entirely. It wouldn’t be anything new for Russia, which has long used its position as the world’s energy supplier to threaten other countries.

But political expediency—and the need to ensure steady supplies of gas—trumped geopolitics and protecting Ukraine’s sovereignty. Europe’s domestic gas production was declining—dropping 9 percent between 2014 and 2015 according to the European Commission —and the continent recognized it needed to become more reliant on Russian gas imports. The project went ahead, and in the intervening seven years the vast pipeline was built beneath the Baltic Sea.

It all turned out to be a waste of time and money. Ahead of Russia’s full-blown invasion of Ukraine, launched in the early hours of February 24, the plans for Nord Stream 2 have been placed on ice. The big question is what that means for Europe’s energy security. “This is an inflection point,” says Thierry Bros, professor at Sciences Po, a university in Paris. “The crisis is a good wake-up call for Europe, and Europe’s naivety.” It’s also a blow to Russia, which relies on the income from gas and oil to support its own economy and, by extension, its war efforts.

At its peak, the 1,230-kilometer pipeline could supply 55 billion cubic meters of gas a year—a tenth of European gas consumption in 2021 alone. In the second quarter of 2021, the latest period for which European Commission data is available, Russia accounted for nearly half of gas imports into Europe, and Nord Stream, the twin predecessor pipe to Nord Stream 2, was the most important supply route of pipeline gas to the EU. And gas imports are vital for Europe: The continent imports three times as much gas as it exports, and twice the amount it produces domestically, according to International Energy Agency (IEA) data.

On February 22, Germany halted the process of certifying the pipeline, an important part of the process of bringing it onstream. A day later, the United States announced sanctions against the company overseeing the Nord Stream 2 project, as well as its leadership. Germany’s foreign minister, Annalena Baerbock, said on February 23 that canceling the Nord Stream 2 agreement, which would have helped Europe’s energy security, was a difficult decision to make. But it was important. “For us as the German government, it was important to show that for a free and democratic Ukraine, we are willing to also accept consequences for our national economy,” she told reporters. “Peace and freedom in Europe don’t have a price tag.”

While Baerbock said peace and freedom didn’t have a price tag, former Russian president Dmitry Medvedev was happier putting a number on the cost of shutting Nord Stream 2 down: “Welcome to the brave new world where Europeans are very soon going to pay €2,000 ($2,225) for 1,000 cubic meters of natural gas,” he tweeted. European gas prices rose 12.7 percent the next day to €927 ($1,030) per 1,000 cubic meters.

Russia is using what the industry calls a “leveraged play.” “It’s essentially a cartel game,” says Adi Ismirovic, a senior research fellow at the Oxford Institute for Energy Studies. “By cutting your supply, your revenue is a lot more,” he explains. In short, Russia will be able to charge more for less gas.

The effective cancellation of Nord Stream comes at a difficult point for Germany, which now faces an energy shortfall just two months after starting a plan to decommission its remaining nuclear power plants by the end of 2022. Nuclear energy accounted for around 6 percent of Germany’s energy consumption in 2020, according to the IEA—half the proportion it was in 2005. Simply switching back on nuclear power is neither politically nor practically feasible. Plans to phase out coal power in Germany, currently penciled in for 2030, may need to be reconsidered. “We have to move from dogmatism to reality,” says Bros. “We have to address our energy policy in a more climate-realistic way.” Bros believes Germans’ attitude to clean energy is going to compound the imminent energy crisis, suggesting what they’ve messed up on around the gas supply will be repeated with nuclear and coal.

Yet it’s not just Germany that will now be feeling the squeeze: Europe’s countries have a spider’s web of pipelines that connect them together, meaning gas that arrives anywhere on the continent can be shipped elsewhere. Global Energy Monitor data estimates that 17,204 kilometers of gas pipelines are either proposed or under construction across Europe, costing €72 billion. Germany’s loss of a giant gas supply source is also Europe’s gap to fill.

How they fill it is less certain. European domestic gas production, which was already suffering a long-term downturn, is about to pick up pace significantly. Production in European countries except Norway is forecast to drop 40 percent in the next five years, according to the IEA. Most of that decrease is driven by cessation of production in the Netherlands—where the country’s giant Groningen gas field, which accounts for around half of all Dutch gas output, is due to close by 2025—and dwindling returns from UK-owned North Sea gas fields.

The UK is losing its might as a significant source of gas—and the chance of that changing any time soon is slim. On February 10, UK energy authorities demanded the country’s only two shale gas wells shut permanently after they halted production in 2019 due to earth tremors. Shale gas production has never come to fruition in the UK like it has in the United States, but did hold promise of a potential new source of gas to replace increasingly tapped-out North Sea supplies. While alternative sources of energy like wind and solar power are increasing their share of energy supply across Europe, they still only work when the sun shines or the winds are high. More far-flung sources of energy, such as hydrogen, are too far away from reality to fill the immediate gap.

The obvious solution to fill any supply shortfall is to ship in gas on tankers. Liquefied natural gas (LNG) imports helped insulate Europe from previous record-high gas prices—close to the €2,000 per 1,000 cubic meters Medvedev has now threatened—in December, becoming more long-lasting when initial worries about an invasion of Ukraine first spooked the markets. In the last three months of 2021, LNG imports into Europe grew by 40 percent compared to the previous year, buoyed by gas sourced from the United States. Historically, around three-quarters of EU gas imports have come via pipeline, and one-quarter by LNG cargoes. That could change in the future.

Qatar could be one major supplier of LNG, but its energy minister told a conference this week that Russia’s role in the global energy mix was irreplaceable. “There is no single country that can replace that kind of volume. There isn’t the capacity to do that from LNG,” said Saad al-Kaabi. 

Besides that problem, the majority of global LNG supplies are already tied up in long-term contracts. Europe will have to fight with the rest of the world for securing those remaining uncontracted LNG cargoes. China recently passed Japan as the world’s largest importer of LNG, and needs plenty of gas to power its burgeoning manufacturing sector. “With hindsight, you can say Europe was pretty complacent,” says Ismirovic. Yet just two or years ago, gas prices were so low that some US LNG exporters were planning to shut down their operations because it was uneconomical. 

And at times of low energy prices, politicians are always loath to punish voters with transitions to alternative sources of energy, instead choosing to curb supply, through banning new drilling, fracking, and pipelines. “You’re putting pressure on supply while leaving demand unscratched,” says Ismirovic. “Basic economics 101 is when you’re curbing supply and letting demand rise over time, you get higher prices.”

There are some small signs of hope—if it can be classed as such. Russia has been underproducing against capacity targets for the past year by about 7 percent, Europe has already lived through reduced Russian supply, and survived, albeit at a financial cost. “Remember what Winston Churchill said,” says Bros. “Security of supply relies on diversification, and diversification alone. We didn’t do this—particularly the Germans—and we are in a position now where we have to pray Putin doesn’t cut off all the gas.”