GIF INSIDE STORY: Can Europe remain afloat without Russian LNG?

Europe’s purchases of Russian LNG in the face of the latter’s aggression in Ukraine is morally and commercially ambiguous. Whether Putin’s regime would be hurt financially from losing European sales is an open question, but an ICIS analysis shows that Europe could afford losing Russian volumes in current market conditions.

LONDON (ICIS)–The EU is on track to import a record amount of Russian LNG for the second year in a row, despite the intention to replace Russian gas with other energy supplies, including LNG from alternative sources.

Russian piped deliveries to the EU-27 bloc have sharply dropped since August 2022, and currently stand at 16 billion cubic meters (bcm)/year in 2023, a 90% drop against the 2017-2021 average (161bcm/year).

European policymakers have become increasingly outspoken on the topic of banning Russian seaborne imports but the industry argues this can be easier said than done.

Energy consultant Andrei Belyi said in a recent article that although expert communities believe in the possibility of ensuring EU gas supply security without Russian LNG, the feasibility and the success of the restrictions against Russian LNG will depend on a number of factors. One of them is Europe’s ability to secure long-term contracts with alternative suppliers.

Belyi also pointed out that the US will need to keep increasing exports to Europe despite rising domestic gas demand.

Competition for LNG supplies with Asia presents another challenge.

“While the last two factors depend on international market dynamics, the first involves European gas companies’ commercial decisions. The main issue lies in their long-term commitments to purchase Russian piped gas, even if Gazprom reduces flows,” Belyi said.

TotalEnergies CEO, Patrick Pouyanne, recent remarks underline the business case for a continuation of the status quo: “We will continue to ship LNG from Russia as long as there are no sanctions, or push, from Europe on the gas.”

The economics of importing low-cost Russian LNG are undoubtedly in favour of the buyer-side, however, to remain in a transactional and dependent relationship with an aggressor, which has pursued a hostile relationship both in military and economic terms, is a risky strategy for the EU.

Critics point out that even if the EU stopped buying Russian LNG that would not prevent the latter from getting profits from gas sales.

“Should Europe limit imports of Russian LNG, Chinese and Indian LNG importers in particular will increase their purchases of Russian LNG at reduced prices for then to sell to European LNG buyers LNG product they lift FOB under long-term contracts from US LNG exporters,” gas strategist and negotiator Morten Frisch said on the social media.

The EU has an intention to be free of Russian fossil fuels by 2027 but Russia has already proven within the field of piped deliveries that it can end Europe’s reliance rather quickly and painfully. The EU should therefore look to eliminate its dependence on Russian LNG volumes sooner rather than later as a partnership with an adversarial entity is like dancing with the devil.

Russian LNG addiction

The EU has received 9m metric tonnes of Russian LNG this year, and if memeber-states continue to import at this rate, the bloc could see imports of 13.5m tonnes.

To put this into perspective, this base case projection would slightly fall short of the record Russian LNG imports witnessed in 2022 (13.8m tonnes), with upside risk remaining a strong factor as a particularly cold winter can add around 20bcm of European gas demand which could blow this figure out.

When digging deeper into the data, Spain ranked first in terms of the biggest EU-buyer of Russian LNG in 2023 (3.5m tonnes), followed by France (2.3m tonnes) and Belgium (1.9m tonnes).

EU imports of the super-chilled fuel are up by 30% when compared to the first eight months of 2021, when Russian pipeline deliveries trumped seaborne imports.

In terms of costs, ICIS estimates the bill for Russian LNG imports in 2023 could exceed €6.5bn, a hefty sum which directly funds the Russian war effort against Ukraine.

While Russian pipeline deliveries now represent 6% of total EU supply, and the continent has shifted its baseload supply to LNG, the bloc still finds itself in the same position; a supply regime propped up by an untrustworthy partner.

‘Soft sanctions’

The EU so far has pursued a ‘wait and see’ approach thereby using rhetoric to publicly condemn Russia as the aggressor yet allowing trade and pipeline flows to continue.

This has been a policy which has been adhered to since Russia first invaded Ukraine and has dominated public discourse as politicians tread a careful line between completely severing political and economies ties and maintaining a forty-year long trade partnership.

This approach ultimately rests upon some wishful thinking that hopes economic relations will slowly deteriorate and once the market tips into over-supply later in the decade sanctions will come into ‘full force’.

However, there are some reports coming out of Brussels that the EU has started to develop a policy mechanism which would allow member states to block Russian companies from booking LNG import capacity at their terminals.

At worst, this would cause a minor disruption to global gas markets, as given how tight supply currently is, there would be some interested buyers within south Asia. This would be similar to the EU’s Russian crude oil embargo; whereby the market was able to balance without much friction.

At worst, Russia would experience some friction from market forces as it wouldn’t be able to perfectly swap its matched demand for its vessels in Europe directly in Asia, although to caveat this the market would eventually balance with time.

No Russian molecules

If the EU were to pursue a retaliatory approach to Russia and completely outlaw Russian LNG imports tomorrow, the bloc would have ample supplies to combat such a measure.

ICIS estimates the potential effects of a complete shut-off of Russian LNG to the continent by assuming gas storage is at 110bcm (total capacity) and countries continue to meet the EU’s 15% demand reduction target.

The scenario that entails a ‘normal gas year’ assumes a five-year average withdrawal rate (2017-21) with all other factors remaining constant, while the scenario without Russian LNG takes the total imports in 2023 to date and is subsequently divided by the number of days this year.

ICIS projects the EU-27 bloc would end the winter heating season with around 65bcm (60% full), assuming 15% demand reductions are continually met and no severe cold weather patterns emerge.

While the reduction of Russian LNG volumes would indeed have a greater call on storage withdrawals, the effect would be around a 10bcm deficit with sites ending the season at around 55bcm (50% full).

All other things being equal, the EU would ‘survive’ the winter heating season with slightly tighter European gas balances, but a storage carry out (55bcm) which is above the 2017-2021 average (38bcm) and no longer an addiction on Russian gas.

This would have the two-fold effect of immediately cutting off Russian revenues, with the state having to immediately find alternative buyers – which won’t be tricky in a tight global gas market with many south Asian buyers interested.

However, it fails to account for the role in which Europe, or in particular Belgium and France, plays in transiting Yamal LNG volumes to Asian destinations. This trade route allows for Russia’s specialised ice-breaker LNG carriers to transfer Yamal LNG volumes at Zeebrugge onto conventional LNG vessels to allow regular shipments to eastern countries.

Although, many upside risks challenge this ‘no Russian LNG’ assumption as Europe was able to end the previous heating season with above-average storage stocks due to an unseasonably mild winter, cold weather events akin to ‘the Beast from the East’ could have a much greater effect on supply availability and severely hinder the EU’s policy to be ‘free’ from Russian LNG.

Supply disruptions also pose further risks, such as an outage similar to Freeport LNG terminal in 2022 or ongoing labour strikes within Australia. These events serve as timely reminders of how perfectly poised the global gas markets are, with a minor disruption sending the equilibrium into turmoil.

However, what this simulation highlights well is that a swift and decisive end to Russian LNG imports is a perfectly plausible option which would strike right at the heart of Russian revenues.

Anything less than this is leaving Europe vulnerable to a potential aggressor which is a risky strategy resting upon the trust between two counterparties which has been massively undermined by one’s invasion of another country. Thus, for the EU to move ahead with its plans of energy security, swift and decisive action is needed to cut its total gas dependency on Russia.