The Russia-Ukraine confrontation is already the first major energy crisis of the transition era. Short-term solutions are few, but Europe needs expedients alongside a long-term strategy. The critical components of the solution lie at home, on the oceans, and in the Middle East-North Africa region.
Even well-informed analysts differ widely on whether Vladimir Putin plans a major war that might occupy large parts of Ukraine or change its regime, a lesser incursion, or is just trying to put pressure on Nato and Kyiv. Whatever are his intentions, events could spiral out of control, especially if neither side backs down for fear of losing credibility or inviting further encroachments.
The energy-related backdrop may raise questions about Moscow’s intentions. During last summer, stored gas in European terminals owned by Gazprom, the state-owned gas export monopoly, was not replenished. From last October, instead of rising as usual to meet winter demand, Russian supplies to Europe (excluding Turkey) dropped off.
Speculation abounded: was this due to a shortage of Russian gas production and a need to refill storage at home to meet anticipated domestic demand? Was it a commercial plan to push up prices and blame Brussels’ opposition to long-term contracts? Was it a tactic to put pressure on Europe to approve the commencement of the recently-completed Nord Stream II pipeline, which will largely replace Gazprom’s need for Ukrainian transit?
The International Energy Agency thinks Russia could increase exports to Europe by at least a third. Whatever the reason, the combination of limited Russian supplies with rebounding global economies and demand, plus a few unfortunate technical breakdowns and weather-related problems around the world, has sent gas and electricity prices soaring to record levels.
Outright conflict would hugely escalate the crunch. Gas supplies through Ukraine, running at about 13 per cent of total European imports, would likely be cut off by one or the other party, or damage to infrastructure, perhaps including cyber attacks, or sabotage following an occupation. Sanctions, even if tailored to permit continuing Russian energy exports, would crimp supplies. In retaliation, the Kremlin might stop gas shipments through other routes too.
Even if no war breaks out, even if Russian gas flows rebound, Europe needs a long-term approach. Its vulnerability will persist through this year if gas flows remain at low levels and stocks are not refilled. And the existing EU climate strategy is not the same thing as an energy security strategy. Climate policy has not caused the current shortages, but it has made Brussels myopic about the continuing importance of fossil fuels.
Despite environmentalist hostility, including legal action against companies such as Shell, it is better that Europe would produce more domestic gas rather than being so reliant on its eastern neighbour, at a high climate and political cost.
Given the climate imperative, it’s unlikely any major new gas pipelines from the Eastern Mediterranean, Middle East or Caspian will be approved. It might be possible, though, to bring gas from Iraq’s Kurdistan region to Turkey and free up other supplies to go west. Europe does need more capacity to move liquefied natural gas and North African pipeline gas imported into the Iberian Peninsula to France and the rest of the continent.
Current high prices are encouraging a wave of new investments in gas liquefaction. By mid-decade, new LNG projects delivering by seaborne tanker from the US, Qatar, east and north-west Africa, and possibly the UAE, will ease market tightness.
It is strange that the IEA mandates each member’s minimum strategic storage of oil, which is freely traded, but not of gas, which is much less flexible. The Netherlands’ key Groningen field used to balance the continent’s winter needs, but it is being shut down because of earth tremors. In its stead, Europe needs binding levels of gas storage, and regulations to prevent Gazprom or any other company abusing its market position.
There will be calls to speed up the already ambitious deployment of renewables, to build new nuclear plants, and perhaps to halt the decommissioning of the few remaining reactors in Germany and Belgium. Electricity interconnections from North Africa would help balance cold, still winter periods in northern Europe when wind and solar output plummet.
Such moves would be worthwhile, but less than a third of European gas demand goes to generate electricity. More important and more difficult is tackling residential heating, almost 40 per cent of European consumption, and industrial fuel, more than 30 per cent.
Home energy efficiency is patchy, with British houses leaking heat three times faster than those in Germany and Norway. Former prime minister David Cameron’s promise in 2013 to “cut the green crap”, yet another dismal legacy of his, slashed money for building insulation and has now added £2.5 billion to British energy bills.
Insulating homes and installing heat pumps is a slow, costly, nitty-gritty process. It is less glamorous for politicians than jetting off to Kyiv or Baku in search of headlines, but essential to keep Europe’s destiny in its hands.
Relying solely on electrical heating would put enormous strain on the grid: European winter gas consumption is two and a half times higher than in summer. Electrification and hydrogen in combination can balance seasonal consumption patterns, and serve industrial fuel needs.
Mena countries, notably the UAE, Oman, Saudi Arabia, Egypt and Morocco, already have ambitious plans for hydrogen production, from both fossil fuels and renewable energy. Without taking sides, there is clearly a huge opportunity here to build a new core business: suppliers of a reliable, clean, reasonably-priced and diversified fuel.
Meanwhile, greatly intensified US and European sanctions on investment and technology transfer to Russia would cut both its longer-term hydrocarbon output and its ability to transition to new, low-carbon exports.
This prospect is further off: it will not save Europe this winter or next. But the continent needs to recapture its strategic energy autonomy – which is not the same as self-sufficiency. It needs to show Moscow that it has options, and that its choices will severely harm Russia’s energy industry, if peaceful diplomacy does not resolve this crisis.
Robin Mills is chief executive of Qamar Energy, and author of The Myth of the Oil Crisis
