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Europe still can’t live without this Russian energy export


Europe may be closer than ever to breaking its energy dependence on Moscow, but it still can’t live without one type of Russian natural gas.

While Russian exports of coal, oil and natural gas carried via pipelines to Europe have fallen sharply since Moscow’s invasion of Ukraine in late February, imports of Russian LNG — a chilled, liquid form of gas that can be transported via sea tankers — have risen.

Imports of Russian liquefied natural gas (LNG) into Europe and the United Kingdom rose by nearly 20% between March and October this year compared to the same period in 2021, according to consultancy Rystad Energy.

European imports of Russian LNG started to accelerate last fall as countries faced a shortage of gas. Russian imports doubled in the year to September to 1.2 million tons, Rystad data shows.

Those shipments could be valued at anywhere between $1 billion and $2 billion, analysts told CNN Business.

Europe has raced to replenish its stocks this year ahead of winter as Russia dramatically cut its flows of pipeline gas, including halting all shipments through the vital Nord Stream 1 pipeline in September. Global supplies of LNG, including — ironically — those from Russia, have proved a vital alternative.

The majority of the Russian LNG imports come from privately owned Novatek, the country’s second-largest natural gas producer after Gazprom. Novatek operates the Yamal LNG project in the northwestern Arctic.

Europe ramped up imports of Russian liquefied natural gas (LNG) in 2022

While the Russian share in Europe’s LNG imports has decreased since the war began, the European Union still imported 11.8 million tons of LNG from Moscow between March and October this year. That is 2 million tons more than in the same period in 2021.

Russia, the world’s fourth-largest LNG producer, currently makes up about 15% of Europe’s total LNG supply, a share that Kaushal Ramesh, a senior analyst for gas and LNG at Rystad, thinks will stay the same next year.

“Europe is keen to keep these volumes going for as long as possible,” he told CNN Business.

But, as with Russia’s pipeline gas, Europe’s appetite for its LNG could leave it vulnerable to sudden supply cuts by Moscow. The ramp-up in imports also conflicts with the bloc’s ultimate ambition to sever ties with Russian energy entirely and to choke off funding for the Kremlin’s war effort.

European sanctions have not yet targeted either form of natural gas because of its importance to the energy security of some countries. That includes Germany, the bloc’s biggest economy.

“The EU needs LNG,” Anne-Sophie Corbeau, global research scholar at the Center on Global Energy Policy (CGEP), told CNN Business.

“So it is convenient for them to turn a blind eye on [Russian] LNG, while Russia continues to enjoy [the] revenues… so far, this LNG has been going mostly under the radar,” she added.

Still relying on Russia

Most of September’s imports went to France, Spain and Belgium, Ramesh said, though some of those cargoes were then reloaded and shipped to countries outside Europe, including China.

So far this year, global LNG imports into Europe have jumped 47% to hit 86 million tons, with the vast bulk shipped from the United States and Qatar, according to Rystad data.

Restocking efforts by EU countries have been a roaring success. Storage levels are at 95% of their capacity across the bloc, data from Gas Infrastructure Europe shows. That’s far above the 88% the bloc averaged over the past five years by this point in the year.

Stores are so full, in fact, that dozens of LNG-laden ships have been waiting off Europe’s ports in recent weeks, unable to find space to unload their cargoes.

But a bigger challenge could emerge in the spring when Europe tries to refill its stores with a much-reduced supply of Russian pipeline gas. Flows to Europe are just 20% of their pre-war levels, according to research firm Wood Mackenzie.

The International Energy Agency (IEA) said in a report last week that the bloc faces a possible shortfall of 30 billion cubic meters of gas next summer if Russia halts all remaining pipeline flows and if Chinese demand for LNG picks up.

That would amount to nearly half of the gas needed to fill winter stocks to the same levels as this year, the agency said.

“With the recent mild weather and lower gas prices, there is a danger of complacency creeping into the conversation around Europe’s gas supplies, but we are by no means out of the woods yet,” Fatih Birol, IEA executive director, said in the report.

The region will need all the LNG it can get to make up for a possible shortfall, including Russian cargoes, says Felix Booth, head of LNG at data firm Vortexa.

“I expect that Russian LNG will continue to play an important role in filling European storage going into winter of 2023,” he told CNN Business.

That puts the continent in a vulnerable spot if Russia decides to weaponize its LNG exports.

Moscow could decide to pressure Novatek into demanding payment in rubles — as state-owned firm Gazprom did for its pipeline gas — or to sell to some countries at lower prices to gain political favor, said Corbeau at the CGEP.

Others think Europe could cope in that scenario by boosting imports from Qatar.

“You would see the market reacting to that dynamic, but [the impact] might remain limited,” said Massimo Di Odoardo, Wood Mackenzie’s vice president of gas and LNG research.

Gas sanctions unlikely

It is unclear how much revenue Russia is making from its LNG sales in Europe, but it is almost certainly much less than the amount it typically gets for its pipeline gas exports.

An increase in European LNG imports from Russia — which Wood Mackenzie forecasts will hit 15 billion cubic meters for the whole year — cannot compensate for an expected 100 billion cubic meter fall in Russian pipeline gas imports over the same period.

And unlike Gazprom’s pipeline exports, Novatek’s LNG sales do not include export duties that are directly funneled back into the Russian state, Di Odoardo said.

The complex ownership structure of the Yamal LNG project would also make sanctioning its exports difficult.

While Novatek owns just over half of the project, France’s TotalEnergies owns a 20% stake, with two Chinese energy and investment companies sharing the rest.

“[Europe] would rather get whatever [it] can in terms of Russian pipeline gas and Russian LNG… it would take a lot before [it] would think about sanctioning gas or LNG from Russia,” Ramesh said.

Source: http://edition.cnn.com