Europe’s reliance on Russian gas has given Vladimir Putin some leverage over the West.

Europe’s reliance on Russian gas has given Vladimir Putin some leverage over the West.Credit:AP

It wasn’t specified where the gas would come from,although clearly much of it in the near term will come from the US,now the world’s largest LNG exporter and the producer with the most uncontracted gas. About 70 per cent,perhaps a bit more,of LNG production from Qatar and Australia is committed under long-term contracts.

The EU is reliant on Russia for about 40 per cent of its gas,or the equivalent of about 120 Bcm,most of which flows through pipelines.

On paper,the 30 per cent or so of LNG – about 135 million tonnes of LNG a year -- that hasn’t been contracted and which is sold in the spot market ought to be sufficient to meet Europe’s needs but that would only happen if it was the only buyer of those spot cargoes and had the infrastructure to handle the massive shift in its energy supplies. Neither of those prerequisites is in place.

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Much of the world’s export gas is produced from remote offshore locations,piped to distant onshore processing facilities – giant refrigerators -- where it is liquified and then transported via massive and highly-specialised LNG carriers. At its destination it is received at import terminals specifically configured for LNG,regasified and then distributed via domestic pipeline networks.

Apart from the currently tight market for LNG and the relatively modest amounts of uncontracted supply,there isn’t much spare capacity within the world’s processing plants,nor does Europe have the import terminals or domestic pipeline networks to manage a dramatic reorienting of its energy supply overnight.

Also,given the tightness of the available supply and that LNG production and distribution is in the hands of private companies,the cost of trying to manage a rapid shift in Europe’s sources of supply would be prohibitive. Gas prices in Europe had soared even before Russia invaded Ukraine as Russia withheld all but its minimum contracted tonnages from Europe.

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The extra 15 Bcm of gas Biden has promised this year will only start the process of weaning Europe off Russian gas. Europe does import about 80 million tonnes of LNG a year already and has spare receiving and storage capacity so has the ability to absorb those tonnes and probably,with some investment,the 50 million envisaged by the deal by 2030.

To completely displace the Russian gas,however,it will need both LNG production to expand and to build the new terminals and distribution networks to receive and distribute the vastly increased volumes of LNG.

It is obvious that,even if it can redirect some of the gas that it has been exporting to Europe to other markets,the invasion of Ukraine and the severity of the response from the West will do severe long-term structural damage to the Russian economy regardless of how Ukraine’s fate is resolved.

While there are new gas fields being developed by Qatar and off the north-west coast of Australia and one new export terminal under construction in the US (with about 27 more in the pipeline for approval) their impact,even if their development were accelerated,will be felt in the second half of this decade at the earliest.

That’s not to say,however,that the Europeans can’t significantly reduce their purchases of gas from Russia and significantly damage its energy sales-dependent economy in the process.

Germany,the most dependent of the European economies on Russian gas is,for instance,in urgent negotiations to secure three floating regasification units. It has already reduced its gas imports from Russia from 55 per cent of its total gas supply to 40 per cent and plans to build two LNG import terminals. The cost of a terminal is about $US1 billion ($1.3 billion).

The EU is reliant on Russia for about 40 per cent of its gas.

The EU is reliant on Russia for about 40 per cent of its gas.Credit:Bloomberg photo by Andrey Rudakov

The EU itself has said it wants to cut its Russian gas imports by two-thirds – about 100 million Bcm – by the end of this year by diversifying its supply,bargaining for gas as a single unit rather than individual economies,speeding up the roll-outs of renewable energy projects,increasing the reserves in storage and substituting alternatives – renewables,coal and nuclear – in heating and power generation.

Russia’s invasion of Ukraine will transform the global energy map. It will also put a floor,at a very high level,under the demand for and pricing of LNG. Europe will have to pay a premium over already-elevated prices to get sufficient gas to have a meaningful impact on its Russian energy dependence. It is going to have to compete with the traditional major buyers in Asia.

It might be helped by China’s commitment,struck just ahead of the invasion,to buy an extra 10 Bcm of gas a year for the next 30 years. Russia exported almost 17 Bcm to China last year. New pipelines that Russia is planning could see the volumes greatly increased,although they would still fall well short of the current European sales and would be at much lower prices.

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It is obvious that,even if it can redirect some of the gas that it has been exporting to Europe to other markets,the invasion of Ukraine and the severity of the response from the West -- including Europe,where the reliance on Russian energy was supposed to give the Kremlin leverage and coerce the Europeans into acceptance of Ukraine’s fate -- will do severe long-term structural damage to the Russian economy regardless of how Ukraine’s fate is resolved.

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