What Happens if Russia Cuts Off Europe’s Natural Gas? - The New York Times

Europe is a huge customer of Russia’s fossil fuels. Gas from the U.S. and elsewhere is helping offset fears of a midwinter cutoff.

Jan. 25, 2022

While Russia masses troops and military equipment near its border with Ukraine, parallel tensions have been building in world energy markets.

It is not hard to see why. Natural gas flowing through a web of pipelines from Russia heats homes and power factories across much of Europe. Russia is also one of the continent’s key sources of oil.

Now Western officials are considering what happens if Moscow issues a doomsday response to the tensions — a cutoff of those gas and oil supplies, in the depths of Europe’s winter.

The standoff over Ukraine comes at an inopportune time. World energy prices are already elevated as supplies of oil and natural gas have lagged the recovery of demand from the pandemic.

In Europe, record high prices are drawing tankers of natural gas from the United States, Qatar and elsewhere. On Tuesday, White House officials said discussions were underway to get more natural gas to the continent. Whether this will be enough to defuse the risk of an energy cutoff remains to be seen.

Here is a look at some of the key issues.

Why has Europe been hit so hard by the energy crunch?

This winter Europe is living through an energy crisis, with soaring prices for natural gas and electricity. It started when storage levels of gas fell well below normal last year.

Natural gas is trading at about five times the price of a year ago. Although prices are now about half of the peak reached late last year, they are roughly seven times higher than levels in the United States. High gas prices raise electricity costs, threaten big increases in consumers’ bills and have pushed some energy-hungry factories like fertilizer plants and metal smelters into temporary shutdowns.

Russia has added to these woes. It has exported less gas than usual and has kept storage levels at European gas facilities owned by Gazprom, the Russian gas monopoly, at rock bottom. Such tactics have helped raise anxiety about whether enough gas will be available to make it through a cold winter.

“If things get really messy in Ukraine, one can only observe that Europe is in an exceptionally vulnerable position right now,” said Thane Gustafson, author of “The Bridge,” a study of the natural gas trade between Russia and Europe.

How important is Russian gas for Europe?

Russia supplies about one-third of Europe’s natural gas, and its prominence as a supplier has grown as the continent’s domestic output has declined.

Production in the Netherlands, once a major gas producer in the European Union, has been dropping sharply as the Dutch government gradually shuts down the huge Groningen field in response to earthquakes set off by gas production.

Gas is also growing in relative importance as coal-fired power stations are shut down in countries like Germany in order to meet environmental goals and nuclear plants are also closed there and in Britain.

Despite Europe’s big investments in renewable energy like wind and solar power, it still needs conventional sources of supply. Gas-fired power plants are one of the few options left.

How seriously would conflict in Ukraine threaten Europe’s gas supplies?

While flows of natural gas vary and have fallen of late, about one-third of Russia’s gas exports to Europe usually go through Ukraine. Those pipelines could become collateral damage during a Russian invasion, analysts say.

President Vladimir V. Putin might cut off all or a large portion of Russian gas flows to Europe in response to still unspecified economic sanctions that the United States and other Western countries have pledged to impose in the event of an invasion.

“If we try to lock them out of capital markets, then they will go to our place of pain, which is energy,” said Helima Croft, head of commodities at RBC Capital Markets, an investment bank.

Would Putin really cut off energy supplies?

Some observers think that Mr. Putin would be wary of taking such drastic steps against what are his most important customers. Doing so would put a key source of revenue at risk.

“While Europe is hugely dependent on Russian gas, Russia is hugely dependent on the European market and can’t easily substitute for it,” said David Goldwyn, who was the special envoy for international energy affairs in the Obama administration.

Mr. Goldwyn, who is now president of Goldwyn Global Strategies, an advisory firm, added that Mr. Putin was trying to strike a balance “between being a reliable supplier as he has been to Germany and reminding Europe how dependent they are on Russian gas.”

He said a similar logic would be likely to govern Mr. Putin’s behavior concerning oil, a more important source of revenue than gas. If Russian oil exports were cut off, consuming nations would expect Saudi Arabia to largely close the gap, but it is worrying that the Organization of the Petroleum Exporting Countries and its allies have come up short on recent pledges to increase output, suggesting that they are close to their ceilings.

Are there any remedies to head off shortfalls?

In recent months Russia has been putting Europe through something of a stress test, squeezing gas flows in an apparent attempt to coerce approval on issues like Nord Stream 2, the $11 billion undersea pipeline connecting Russia to Germany that is awaiting final approval.

Gazprom says it is not doing anything unusual, maintaining it “delivers gas in accordance with consumer requests in full compliance with current contractual obligations,” a spokeswoman said.

But while storage levels remain low and prices are high, Europe has not run out of the fuel.

Market forces are working, if belatedly. An armada of giant ships has been bringing cargoes of liquefied natural gas, which is gas chilled to liquid form, lured by high prices and cajoling from the Biden administration. The ships are coming from the United States and elsewhere, and a single tanker can hold the equivalent of three times the current daily transit volumes from Russia through Ukraine.

The surge has been significant: In January, flows of liquefied natural gas to Europe have actually exceeded those of Russian gas. These shipments, along with a relatively mild winter so far, have at least temporarily eased fears of a shortfall.

“There is less risk of running out of gas,” said Massimo Di Odoardo, vice president for gas at Wood Mackenzie, a market research firm. “Concerns of blackouts are now becoming less.”

Mr. Di Odoardo said that another reason for January’s decline in Russian gas flows to Europe is that European utilities, at current high prices, are choosing to sell what gas they do have in storage, rather than buy from Russia.

Whether liquefied natural gas shipments could offset a complete shut-off of Russian gas to Europe is doubtful. Liquefied natural gas tankers require special terminals, and Europe probably does not have enough receiving terminals to match such enormous losses.

“Import capacity in Europe is being tested right now, so the region would struggle to take substantially more,” said Laura Page, an analyst at Kpler, a research firm.

How is the standoff likely to leave Russia’s relations with its customers?

Probably worse. The show of force on Ukraine’s border “is going to damage them commercially in the market,” said Trevor Sikorski, analyst at Energy Aspects, a research firm.

Mr. Putin’s behavior has most likely raised doubts about Russia’s claims to be a reliable energy supplier, and it may well hasten the shift away from fossil fuels to renewable energy, a move that undercuts the Russian economy.

“This crisis will only accelerate the geopolitical motivation to get off the dependency on gas in general and Russian gas in particular,” Mr. Goldwyn said.