Russian President Vladimir Putin has added martial tension to Europe’s gas crisis. Europeans struggling with prices inflated by a post-pandemic supply crunch are now confronted with a possible invasion of Ukraine by the continent’s biggest gas supplier. While a conflict would clearly make things worse, a range of factors may cushion the blow.

The worst-case scenario, outlined by U.S. administration officials on Tuesday, is terrifying. Russia provides about a third of Europe’s 450 billion cubic metres (bcm) of annual gas consumption, mostly via long-term contracts which pump it through pipelines via Ukraine, Belarus, Turkey and the Baltic Sea. If Putin closed the taps following an invasion, or if western countries imposed sanctions that barred all purchases of Russian gas, Europe would face a much bigger energy crisis.

The European Union and United Kingdom produce about 60 bcm of gas a year, according to data compiled by the Oxford Institute for Energy Studies. That’s two-fifths less than in 2017. Meanwhile Europe imports about 80 bcm of liquefied natural gas (LNG). While producers exported 500 bcm of LNG globally last year, meeting roughly a tenth of global gas demand, almost 75% of that went to Asia. As a result, Europe went into the winter with unusually low gas reserves.

This gives Putin, who controls at least half of the 300 bcm of gas pumped to Europe through pipelines each year, extra leverage. Some analysts suspect he has already been holding back supply. Russian exports flowing through Ukraine this month are much lower than usual. For European consumers struggling with gas and electricity prices that have quadrupled in the last year, further shortages could be economically catastrophic.

If Russian gas exports stopped entirely following an invasion, Russia could cope for a while. High oil and gas prices have inflated Moscow’s already sizable $800 billion of foreign exchange, gold and wealth fund resources. That creates a buffer against shutting off the main export market for an industry which represents nearly two-fifths of Russian budget revenues. But the interruption would destroy Russia’s reputation as a reliable supplier and accelerate efforts by European governments to reduce their dependence on imported gas by switching to lower-carbon energy. Meanwhile, the potential fallout for European economies means western countries will probably stop short of imposing a total ban on Russian gas purchases: the most recent sabre-rattling is focused on restricting financing for new gas projects.

A Russian invasion of Ukraine might still cut off the 40 bcm of gas contracted to pass through the country each year. But ICIS analyst Tom Marzec-Manser thinks Russia could re-route a chunk of those exports via Belarus. Extra LNG imports could conceivably cover some of the shortfall. The United States is already leaning on sellers like Qatar and Australia and big buyers like Japan and South Korea to divert cargoes to Europe. Meanwhile, soaring European prices have attracted LNG tankers like moths to a lamp. In recent weeks the EU and UK have imported the daily equivalent of 500 million cubic metres, more than double last year’s level.

Corporate incentives are another factor. One reason Russia has pumped less gas to Europe than expected this month is because European industrial companies and utilities like Eni have not been buying as much of it. Supply contracts with Russian giant Gazprom allow them to take up less than the mandated supply if they can get it cheaper elsewhere. In December the cost of buying gas a month in advance soared, creating an unusually large premium over the cost of buying from other sources on the spot market. That gap has now narrowed. Hence European corporates are likely to buy more gas from Gazprom again next month, even if concerns about a war escalate.

None of this should make Europeans feel complacent. The uncertainty will keep gas prices high, intensifying pressure on governments to help customers with their utility bills. But the worst-case scenario in which war in Ukraine forces large sections of the bloc’s economy to shut down can be avoided.
Source: Reuters (Editing by Peter Thal Larsen and Oliver Taslic)