A Russian natural gas supply cutoff to Ukraine due to unpaid bills in the amount of $3.51 billion – which could occur next month – would also indirectly impact the European Union. Over half of Russia’s gas exports to Europe transit the Ukraine. A recent Bloomberg article draws the conclusion that it will be extremely difficult for Europe to wean itself off Russian natural gas any time soon. To support the argument, the article cites research by Sanford C. Bernstein elaborating on options and costs of such an endeavor: “While Europe has 12 options for replacing Russian gas, they would require $215 billion of infrastructure and boost annual costs by $37 billion.”
According to Bloomberg, the Bernstein research estimates that “six short-term alternatives would help save 57 billion cubic meters of annual [European] demand and cost $33 billion a year.” These short-term alternatives include “drawing down gas stocks, switching to oil in power and paying higher prices for LNG than Japan”, in addition to natural gas demand reduction and, at a minimum, curtailment of natural gas to gas-intensive industries.
Focusing on the question of whether annual Russian natural gas deliveries to the EU can be replaced within the coming year, the European think tank Bruegel proposes options – together with caveats – that would Europe to replace Russian gas and what it would cost both Russia and the EU respectively to do so. To properly assess if Russian gas can be replaced in the short term, Bruegel suggests thinking along the following lines:
- How can the total volume of Russian gas supplied to EU member countries – about 130 billion cubic meters in 2013 – be replaced?
- Would the alternative supply be available at the right time? Note, natural gas consumption in the EU is “up to three times higher in the coldest winter months than in the summer.”
- Can Europe get the alternative supply to where it is consumed? This question is meant to take infrastructure constraints into account.
Bruegel identifies three scenarios for replacing Russian gas: (1) alternative natural gas supplies (2) switching energy consumption from natural gas to other fossil fuels (e.g., coal) and (3) reducing gas consumption. In order to substitute Russian natural gas, alternative imports could come from sources such as North Africa, the Netherlands, Norway, or in liquefied form from Qatar.
Bruegel analyzes the feasibility of obtaining natural gas from those potentially alternative sources:
“Europe in 2013 received natural gas from Russia (27%), Norway (23%), North Africa (8%), as liquefied natural gas (LNG) from other suppliers (9%) and domestic production (33%). Increasing pipeline imports from Norway (102 bcm in 2013) is possible up to about 120-130 bcm. There is certainly spare capacity for importing more in the summer months to fill the European gas storages. Increasing natural gas imports from North Africa by at least 5 bcm also seems feasible. The cost of this gas might be slightly higher than Russian gas. (…) Most importantly, however, LNG import capacities were underused in 2013. There is about 180 bcm/year of existing re-gasification capacity in the European Union, plus an additional 35 bcm under construction. But only 46 bcm was used in 2013 (versus 65 bcm used in 2012). (…) Certainly there are some spare capacities that could be rerouted to Europe for modest price premia. (…) [At Asian prices], however, significant amounts of gas can be attracted to Europe, which is closer to the LNG production centres in Africa, the Middle East and South America. (…) In 2013, the largest natural gas field in Europe – the Dutch Groningen field – for example produced significantly less gas than it is able to deliver [due to legislation aimed at reducing production in order to control gas-production induced seismic activities].”
In contrast to the Bernstein report cited by Bloomberg, Bruegel’s assessment of the situation in the short term seems much more optimistic and concludes that replacing up to 190 bcm of natural gas imports from Russia for the coming year would not be impossible, though admittedly a significant challenge. Bruegel adds that the “economic impact would be significantly less than that of the 1970s oil crisis, and the impact on Russia would be more severe than the impact on the EU.”
The following chart is interactive and shows the relative interplay among potential alternatives, while making simplified comparisons. It displays different scenarios relative to the preferred mix of alternatives and also computes – calculated on the basis of each alternative’s relative cost – the estimated costs of those different options on both Russia and the EU respectively.
‘Deep Impact’ Scenario: EU Uses All Replacement Options Available
Source: Bruegel; View your own optimal mix of options with the interactive chart here.
