Energy crisis in European winter

Today Europe is struggling to contain an energy crisis that could lead to rolling blackouts, shuttered factories and a deep economic recession.
Image used for representational purpose only. (Photo | AFP)
Image used for representational purpose only. (Photo | AFP)

The Russia-Ukraine conflict, euphemistically called a “special military operation” by Russia when it launched the offensive over seven months ago, was not expected to last more than a few days or weeks. The fact that Ukraine has withstood the onslaught of the mighty Russian army, albeit with the support of armaments generously provided by the West, chiefly the USA, has come not only as a rude shock to Russia but also as a huge surprise to the world.

The world, particularly the developing countries in Asia, Africa and Latin America, is suffering heavily due to the disruption in supply chains, shortages and high prices of energy, food and fertilizers.

Europe has also been severely impacted because of its heavy dependence on Russia for its energy requirements.

Europe is the biggest purchaser of Russian crude, receiving 138 million tons in 2020 out of Russia’s total exports of 260 million tons — or 53%. Europe imports almost all of its crude and gets a quarter of its supply from Russia. In theory, Europe could replace those barrels from suppliers in the Middle East, whose exports now mostly go to Asia, and source oil from the United States, Latin America and Africa. But it would take time for global markets to make that adjustment.

Russian gas makes up around a third of all natural gas used in Europe. Among the continent’s major economies, Germany imports around half of its gas from Russia, while France obtains a quarter of its supply from the country. According to the latest available data, it relies more heavily on Norway. Italy would also be among the most impacted major economies at a 46% reliance on Russian gas. On the other hand, the UK draws half its gas supply from domestic sources and imports mostly from Norway and Qatar. Gas used in Spain also comes from different locations, the biggest trade partners being Algeria and the United States.

Some smaller countries in Europe rely exclusively on Russian gas, namely North Macedonia, Bosnia and Herzegovina, and Moldova. Dependence also exceeds 90% of the gas supply in Finland and Latvia.

It’s much more difficult to find alternative sources of natural gas because it is delivered mainly by pipelines. It is easier to find other sources for oil, which mostly moves by tankers and is traded globally.

Much of the Russian gas is exported via Nord Stream I pipeline. Capacity was expected to double early this year with the operationalization of the second pipeline—Nord Stream 2. However, before the second pipeline could start functioning, Germany halted its certification on 22nd February in response to the Russian decision to recognize the independence of the Donetsk and Luhansk People’s Republics.

At the beginning of the conflict, Europe was struggling to find ways to stop paying $850 million a day to Russia for its energy supply, viz. $450 million a day for oil and $400 million per day for natural gas. EU leaders realized that reversing decades of dependence on Russian oil and gas is not a simple matter.

Reducing Europe’s dependence on Russian gas has been widely discussed for the past 15 years by EU leaders in Brussels. Despite alarm bells from a January 2009 crisis that led to the disruption of Russian gas transiting through Ukraine for two weeks and Russia’s annexation of Crimea in 2014, Europe has not stemmed natural gas imports from Russia. In contrast, Russian gas deliveries to Europe increased post-2014. Europe also started importing Russian LNG in 2017.

Today Europe is struggling to contain an energy crisis that could lead to rolling blackouts, shuttered factories and a deep economic recession. Russia has choked off the supplies of cheap natural gas used by the continent for years to run industries, generate electricity and heat homes.

The crisis deepened over recent weeks when Russia’s state-owned exporter Gazprom closed Nord Stream I, the main pipeline carrying gas to Germany, blaming an oil leak and claiming the problem could not be fixed because of wide-ranging sanctions restricting the supply of spares and equipment to Russia. European officials claim that this represents the weaponization of energy by Russia, which the latter vehemently denies. Europe is, however, convinced that this is energy blackmail aimed at pressurizing and dividing the EU for its support to Ukraine against Russia’s invasion. To compound matters further, both Nord Stream I and II have developed leaks ostensibly due to sabotage which has made them unusable for the transportation of gas to Europe.

To effectively confront this challenge, Europe has lined up all the alternative gas supplies it could: shipments of liquefied natural gas from the United States and more pipeline gas from Norway and Azerbaijan. Germany is keeping coal plants in operation that it was going to shutter to reduce greenhouse gas emissions. It is also keeping the option of reactivating two nuclear plants it was set to close. EU has approved a plan to reduce gas use by 15% by next March, roughly the amount experts say will need to make up for the loss of Russian gas. Yet those conservation measures are voluntary in member countries for now.

National governments have approved a raft of measures: bailouts for utilities forced to pay exorbitant prices for Russian gas, cash for hard-hit households and tax breaks. For example, Germany has approved a third support package with Euros 65 billion ($64.3 billion) in aid for consumers. Such spending will add to national deficits but soften the downturn that economists predict for the coming six months.

More steps are coming. EU Commission President says a new proposal will include a price cap on natural gas and measures that could decouple the price of electricity from gas.

Perhaps most important, in the short term, Europe has managed to fill 85% of its storage for winter with the help of LNG and diminished consumption because of high prices. Storage levels have kept rising even after the Nord Stream 1 cutoff. Partly as a result, gas prices have fallen to their pre-cutoff level, although they are still painfully high.

The next half year is destined to be particularly challenging for Europe, not only in the battlefields of Ukraine but also in the hearths and industries across the continent.

Energy Crisis in European Winter

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The New Indian Express