EU drop in Russian gas imports raises hopes of energy independence

EU imports of Russian liquefied natural gas dropped slightly last year after a surge in 2022, as confidence is growing that the bloc can finally rid itself of fossil fuel imports from Russia.

Policymakers in Brussels are working to finalise legislation that would allow member states to fully ban Russian gas imported via pipeline as well as LNG, nearly two years since Moscow’s full-scale invasion of Ukraine prompted the bloc to start weaning itself off hydrocarbons from Russia, The Financial Times reports.

Some traders, analysts and EU officials believe the legislation could enable a gradual reduction to zero, down from nearly half of EU supplies before the war, without big impacts to the European gas market.

The Kremlin’s weaponisation of pipeline gas to Europe in the run-up and the months following the February 2022 invasion prompted EU capitals to look for alternatives. The bloc’s rising LNG demand was mainly covered by the US, but it ironically also led to a jump in imports of gas shipped from Russia, which remains one of the big producing nations.

Russian LNG and what remains of Russian pipeline gas only accounted for 13 per cent of the bloc’s overall supplies last year, down from 40 per cent in 2021, according to S&P Global Commodity Insights.

The EU’s LNG imports from Russia stood at 20.5 billion cubic metres worth of natural gas in 2022, a jump of 30 per cent compared with 2021. Last year, it saw a marginal drop to 19.8 bcm, data from London Stock Exchange Group showed.

Kadri Simson, the EU’s energy commissioner, said last month that the new rules allowing member states to ban the booking of capacity in the bloc’s gas pipelines and LNG terminals were a “proportionate and targeted way” for EU countries to cut Russian supplies.

The rules should provide a basis for EU companies to break contracts with Russian gas providers without paying hefty compensation, EU officials have said.

“There is now a significant potential” for the EU to get rid of Russian molecules, said Ben McWilliams, affiliate fellow at the think-tank Bruegel. Countries in the bloc have taken measures such as adding renewables to reduce gas dependency, and there will be more non-Russian LNG supplies available in the next two years that the EU can call on, he said. “The momentum has shifted in Europe in this game.”

Where the EU finds itself now is in stark contrast with 2022, when Moscow curbed pipeline supplies as it proceeded with its invasion of Ukraine. The EU was forced to scramble for LNG on the global market to replace the lost volumes, and European benchmark gas prices reached above €300 per megawatt hours in the summer, at the height of the energy crisis.

Gas prices are now a tenth of what they were at the peak of the crisis, with storage levels comfortably above the previous five-year average.

If Russian LNG is phased out of Europe, “there will be some upward pressure on the European gas price, but it shouldn’t be a monumental price change”, said Peter Thompson, director at consultancy Baringa Partners.

“You are rerouting geographically close Russian LNG to flow further, most likely to Asia, and Europe needs to get supply from somewhere else.”

But a halting of the pipeline flows may prove harder, as several landlocked member states, notably Hungary and Austria, still rely heavily on those molecules.

“How do you get gas into those countries is a much more difficult question to answer right now,” said Thompson. But even so, once infrastructures such as the planned LNG import terminals across Europe are in place, “that will be an easier question to answer”.

Austria has already moved to diversify its supplies, with the country’s energy group OMV inking a deal in November with US LNG producer Cheniere Energy to receive LNG from 2029.

Hungary, however, has not made any steps to wean itself off Russian imports, which transit Bulgaria and Ukraine. A Russia-Ukraine transit agreement for pipeline gas is expiring at the end of this year and Simson said that she had told ministers about alternative routes when that happens.

Analysts have warned of risks to Europe’s security of supply, one of which is gas demand bouncing back. One factor in the subdued prices and ample gas in storage is the massive demand reduction the bloc has seen, with some factories having halted operations due to the high prices.

EU gas demand was on course to drop 7 per cent in 2023 compared with an already low 2022, according to S&P data.

“Governments and policymakers are feeling more relaxed about the gas situation, which I continue to suggest is a false comfort,” said Michael Stoppard, global gas strategy lead at S&P Global Commodity Insights. “I don’t think we have a good idea of where the equilibrium level of demand is.”