As conflict escalates, Russian gas supplies climb

Gazprom's gas supplies to Europe increased in February versus January, with much of this growth actually occurring after war in Ukraine broke out. This was because European utilities that nominated only the minimal amount of gas in January were incentivised to request more Russian volumes as spot prices were lowered than contract prices.

Gazprom's monthly exports to Europe

Source: Gazprom, Entsog, thierrybros.com

As we noted last month, we should be asking European utilities why they were only requesting what could be considered the minimal contractual amount of gas in January. There was a commercial incentive, but their actions jeopardised European supply security and could backfire as European public opinion is strongly in support of Ukraine.

Split of Gazprom's monthly exports to Europe

Source: Gazprom, Entsog, thierrybros.com

EU LNG send-outs (excluding Malta)

Source: GIE, thierrybros.com

When gas storage withdrawals began on October 21, 2021, the facilities were worryingly only 77% full. And by the start of this year, utilisation had fallen to only 54%. Thus far, the significant drop in Russian exports has been completely mitigated by extra LNG regasification. Storage facilities were 29% full at the end of February, which is back within the historic range.

EU storage utilisation

Source: GIE, thierrybros.com

With the return of war in Europe, we have to make plans to replace all Russian energy commodities with alternatives. To displace coal and gas, the EU should:

• Continue buying additional non-Russian coal and gas on spot markets.

• Facilitate switching from gas to coal in power generation regardless of the CO₂ cost, to reduce the risk of blackouts and recession by burning the least expensive fuel.

• Temporarily freeze the EU emissions trading system for a few years to avoid extremely high CO₂ permit prices that would negatively impact consumers with zero benefit to the climate. ETS is a peacetime tool for reducing emissions, and becomes irrelevant when CO₂ emissions are rising during war.

• Initiate long-term requests to the US, Norway and Qatar to expand gas supplies to the EU via pipelines and in LNG form from 2026. This will help the bloc replace 170bn m³ of Russian gas and 482 TWh of coal over the long term.

• Start constructing nuclear power plants that will effectively decarbonise energy systems from 2040, while continuing to invest significantly in renewables.

The outcomes of such a broad new strategy would be:

• Pain for the EU in the short term as it could lead to blackouts and recession, but it would exert pressure on the Russian government.

• Reducing and eliminating the risk that Russia poses to security of supply in the medium term

• A return to a long-term pragmatic climate strategy

Dr Thierry Bros

Professor at Sciences Po and energy expert

March 3, 2022