Al Jazeera’s English service asked me about the importance of the first-ever delivery of USA LNG to Germany on 3 January, as it was arriving at the newly installed Hoegh Esperanza FSRU (Floating Storage and Regasification Unit), in the Nord Sea port of Wilhelmshaven, near Hamburg.
The terminal is operatated by Fortum subsidiary Uniper, the recently nationalized German gas firm, and is the first of seven such terminals various firms and the German state plan to install over the next two-to-three years to help offset the loss of Russian gas imports it formerly relied on for about 60% of the nation’s natural gas.
I emphasized that Russia has locked the EU into what is expected to be a several-years-long energy war. This energy war against Europe should be understood as a second front launched by Putin’s Russia in support of its failing hot-war in Ukraine.
In addition, the aggressor in this energy war, like in the Ukraine War proper, is Russia. The aim is of weaponizing the continent’s overdependence on Russian exports, is to cause energy and economic hardships sufficient to undermine the solidarity of Germany and other EU Member states with Ukraine.
With the exception of the joint agreement between German Chancellor Scholz and USA President Biden to halt the Nord Stream 2 pipeline, before it was ever commissioned, if Putin invaded Ukraine, the EU and USA have not imposed any further sanctions or restricted the import of Russian gas into Europe, and payments for this Russian gas was not sanctioned.
However, it rapidly became clear to the EU and its Members — with few exceptions, such as that of Hungary’s Orban — that Russia is not a reliable energy supplier and never will be as long as a regime such as Putin’s remains in power.
Indeed, over the time from especially about March of 2021 through September 2022, Gazprom, the Russian state gas export monopoly, first increasingly refused to sell any spot-market (i.e., short term sales) gas volumes needed to reliably fill EU storage before Winter 2021-22. This included, especially, flows though the Yamal-Europa pipeline transiting Belarus and Poland into Germany, with another branch across Ukraine into Central and Eastern European (CEE) Member states. (See: FT and posts at GlobalBarrel.com: here, here, here, and others.)
Then, Putin’s regime also reduced, on various spurious excuses, long-term-contracted pipeline flows into the EU, eventually totally ending flows via Nord Stream 1 in September 2022, and sharply reducing flows transiting Ukraine from Russia into EU CEE Members.
Finally, in my view, it was Putin who ordered the outright destruction of both Nord Stream 1 and 2 pipelines, with explosives, on 27 September 2022. It seems very likely to me, from discussions with persons who have long worked in the European natural gas sector, that this physical destruction serves the purpose of making an unassailable case for “force majeure.” This is needed to excuse Gazprom’s unilateral breaking of numerous multi-billion Euro long-term contracts to deliver pipeline gas to various European firms.
As long as any Russian involvement in the explosions remains hidden, Gazprom will argue in EU contract-arbitration tribunals and then in EU courts that, because the pipelines are no longer intact, it is not liable for this non-delivery of contracted gas and for the subsequent huge costs and even bankruptcies of EU gas firms which this has caused.
Otherwise, without this physical destruction of the pipelines, Gazprom would surely lose in these procedures and be ordered to pay huge compensation for breaking contracts, likely in the tens-of-billions. Unable and/or unwilling to pay such sums to European firms, Gazprom (i.e., the Russian state) would be in jeopardy of having its extensive physical assets in Europe and elsewhere being taken as compensation for non-payment of damages under the orders of the various Members’ and other states’ courts, which would respect the judgements of the arbitration tribunals.
In short, it is Russia which has systematically weaponized the deep, over-dependence of the European Union on Russian gas imports.
As a result, even German Chancellor Olaf Scholz, who as finance minister in the previous Merkel government strenuously advocated for the German energy partnership with Putin’s Russia, allowing EU dependence on Russia to remain at a 40% level, now says Germany can no longer consider Russia a reliable source of energy..
Accordingly, the EU, in its REPowerEU plan has set targets for its Members to ramp down imports of Russian gas and to rapidly find substitutes, to save energy, to build the infrastructure required to import new sources, and to negotiate contracts for new natural gas supplies via both pipelines and as LNG.
In addition, this will deny the Russian state much of the profits it needs to finance its war of aggression against Ukraine.
In this brief interview with Al Jazeera, I distinguished between short and long term issues for Germany and Europe related to LNG imports.
In the shorter term, Germany and other states have to rapidly ramp up the number of LNG import terminals and build connecting pipelines into the existing European gas pipeline grid. They also have to make deals with countries from Azerbaijan to Egypt, Algeria, Norway, and several others to ramp up pipeline imports, including building new pipeline capacity from these counties into the EU.
However, the other problem is that there simply is not enough LNG being produced in the world to completely replace Russia’s former pipeline export volumes into the region. This can only be fully replaced when especially huge new gas-production and liquification-facility expansion projects in both Qatar and the USA come online. This is not expected to be the case until about mid-2026 or into 2027. Until then, the price of gas in the EU is expected to remain high and volatile, with chronic risks of shortages.
Thus far, in the Winter of 2022-23, EU has been lucky as well as having preserved unity in storing and acquiring alternative supplies of natural gas.
Conversely, Mr. Putin has been very unlucky. The weather this year, after about 40% of heating season gone, has so far been mostly mild and natural gas reserves have not been run down; in fact, they are at about a 10-year high for this time of year., and a bit of refilling has even taken place.
So too, with China being on COVID lockdown for most of 2022, this has meant that about 5-7% of global LNG volumes that China did not take need to use in the past year has been available for Europe to purchase. This will of course change whenever China significantly resolves its present Covid wave, likely by mid-2023, though one should add significant error bars to this estimate due to risks of new Covid strains, social or economic/financial crises there, supply-chain shortages, or the opposite – a faster than expected rebound.
Extremely high prices for LNG in Europe have drawn much of what LNG is offered on the spot market (i.e., gas not tied up in long term delivery contracts) away from Asia into Europe, allowing it to build up storage volumes to get through this winter.
Even though European gas prices have dropped dramatically now that the marked expects no shortage of gas to occur later this winter, prices are still much higher than they were before the war. This means that the economic impact is still severe. There has been significant demand destruction (i..e, gas “savings”) in especially industry, which is having significant impact, although, in my view, it is still not clear how significant and how long lasting. How many industries will be forced to discontinue production of high-energy-consuming products due to their being unprofitable to produce, and how many firms will move this production abroad – e.g. to the USA where gas is very cheap – or abandon their production or even go bankrupt. a
There will also remains the risk of gas-shortage crises during the next several winters.
Both the energy war in Europe and, unfortunately, the hot war in Ukraine will continue for the foreseeable future. In the long run, Europe, America and other LNG producers in the Middle East, Australia and Latin America have the full capacity to replace Russian natural gas exports formerly supplying Europe.
So too, the Ukrainian military, with continued supplies and aid from the USA and NATO allies, has the capacity to defeat Putin on the battlefield.