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Bloomberg: Europe cannot give up Russian gas

At an industry meeting organized by the Oxford Institute for Energy Research last week, the assembled executives, politicians and consultants were asked whether the European Union would make Russia its main gas supplier again. A simple survey showed a 40% to 40% split, with the remainder undecided, writes energy expert Javier Blas. His position was presented by the American agency “Bloomberg”.

The author claims to support those who voted “yes” even if Vladimir Putin remains in the Kremlin. Although European leaders promise not to return to business as usual (with Russia) after the conflict in Ukraine, the inescapable realities of geography and markets can overwhelm even the staunchest of politicians.

Whether or not that happens is relevant not only to European energy markets and their industrial giants, but also to future investments in the gas industry in countries from Qatar to Mozambique to the United States. Billions of dollars worth of gas export investments are at stake.

First, a little history. Before Putin ordered the invasion of Ukraine, Moscow was supplying Europe with around 40% of its gas consumption. The energy bridge, built over decades, withstood the most inhospitable episodes of the Cold War, the collapse of the Soviet Union and the liberalization of European energy markets.

That all changed in February. Putin has begun weaponizing gas, cutting exports to one European country after another, hoping to destroy the bloc’s pro-Ukrainian unity. The region still buys a lot of Russian liquefied natural gas (LNG), but pipeline exports have declined sharply. The share of Russian gas in the European budget will decrease in 2023 to below 10%. And while the European Union banned the import of oil from Russiait has not done the same with Russian gas.

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At the same time, the International Energy Agency models a scenario in which Russian gas supplies to Europe will be minimized by 2025 and zero by 2028 due to increased LNG imports and increased production of energy from solar and wind plants. The agency said it suggested the suspension of Russian-European gas trade could become “permanent”.

Demand for Russian gas in the EU fell sharply in November

Demand for Russian gas in the EU fell sharply in November

New measures against the Kremlin

Rulers in European capitals are adamant that they have learned their lesson. “We will be truly free only when we can do without Russian gas“, Austrian Energy Minister Leonore Gevesler said late last month.

The opinions of “those more firmly on the ground” are more diverse. Michael Kretschmer, leader of the German state of Saxony and a prominent conservative politician, said last month it would be “historically ignorant and geopolitically wrong” to run out of Russian gas forever. For many German politicians, prices matter. Berlin currently pays 140 euros per MWh to import gas, about seven times the 2010-2020 average. Germany is now spending billions on subsidies to appease its consumers and businesses.

The history of oil provides examples of some unlikely reversals. Let’s take Iraq. The United Nations imposed a blanket embargo on Iraqi oil four days after it invaded Kuwait in August 1990. And even after the United States defeated Saddam Hussein a year later, Washington insisted on maintaining the embargo to deprive him of funds to wage a new war. In 1996, the United States lifted the embargo, replacing it with a system known as oil-for-food, which allows Saddam to use the proceeds from the sale of crude oil for humanitarian purposes. In 2001, the United States was importing as much Iraqi oil as it had in the early 1990s, and all the while Saddam remained in power in Baghdad.

Could the same thing happen with Russian gas and Putin? It’s entirely possible. Europe will probably never go back to the old long-term contracts with Russia and will most likely need less gas over time thanks to renewables. But if it is to keep its chemical, food and heavy industries competitive, it will need very cheap gas. And there is no gas cheaper for Europe than Russian gas.

To some extent, Kiev can insist that Europe buys Russian gas through pipelines that cross Ukraine from east to west. As part of any peace deal, Russia would likely have to contribute to the costs of rebuilding Ukraine. That bill could be in the tens of billions of dollars, if not more. How will the Kremlin, whoever runs it, pay for it? Just like Saddam, successive Iraqi leaders paid exactly $52.4 billion in reparations to Kuwait by February 2022: through the sale of fossil fuels.

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