Even as gunfire sounded in Ukraine’s capital, natural gas kept flowing normally through the major pipelines from Russia to Europe – but the invasion and accompanying sanctions are casting a shadow over longstanding energy ties, for the coming weeks and the longer term.
Europe, along with the rest of the world, is already facing high gas prices and an energy crunch that has hit consumers in their pockets. Russia’s attack on Ukraine has rocked energy markets, not least because Europe depends on Russian supplies of natural gas.
Here are key things to know about the impact of the invasion on energy:
– What is the situation with gas supplies and prices?
Natural gas prices soared on news of the invasion on Thursday even as gas flowed normally, according to pipeline operators. Prices fell sharply on Friday after US and European officials said sanctions against Russia would not interrupt energy supplies or, almost as important, payments through banks for shipments of oil and gas.
But fears of an interruption in gas supplies have rattled markets. Russia accounts for more than 30% of Europe’s gas for home heating, industry and generating electricity, and other potential supply sources are inadequately prepared to bridge the gap if Russian gas is cut off, analysts at Rystad Energy said.
“A complete halt to gas exports from Russia is highly unlikely, but gas piped through Ukraine — which represents 8% of European supply — is very much at risk,” the analysts said.
Supplies of liquefied natural gas brought by ship from the US have helped relieve some of Europe’s gas shortage this winter, but it is expensive and export terminals are running at capacity.
In response to the invasion, the German government has frozen the approval process for the already-completed Nord Stream 2 pipeline that would bring gas direct from Russia under the Baltic Sea. Russia’s state-owned Gazprom could still use other pipelines through Poland and Ukraine, so Nord Stream 2 is not needed for additional supply but to keep gas affordable and avoid interruptions like the pricing disputes.
– What does all this mean for consumers?
The conflict is adding to the surging energy prices already plaguing Europe and the US, crimping consumer spending and holding back economic growth. If oil prices rise to 120 dollars per barrel and gas prices remain elevated, inflation would rise by a full percentage point and slow economic growth this year, analysts at Berenberg bank said.
European governments have rolled out cash subsidies for consumers hit by higher utility bills. Some heavy users of gas have halted or reduced production, such as producers of fertiliser, which has become more expensive in turn.
Farmers have seen higher costs to fuel their equipment and those costs will turn up in food prices as well. Some people who switched to discount providers — who rely on energy from wholesale markets — have faced sharply higher bills or had their contracts cancelled when the supplier faced losses from high prices.
– Why did sanctions not target oil and gas from Russia?
US officials went out of their way to say they were not seeking to block Russia’s energy shipments despite it being a mainstay of Moscow’s budget and thus a chief source of funding for the Russian military attacking Ukraine.
The reason: global energy supplies are tight and prices are high. Cutting off Russian oil would send prices soaring and worsen the inflation plaguing the US and Europe, while Europe would struggle to replace Russian gas.
– So Russia is the boss on gas?
Not quite. Europe is the biggest customer for Russia’s state-owned utility Gazprom, with 83% of its sales in 2020. Gazprom has sought to diversify by selling to China.
But pipelines link much of its gas to Europe, and Russia has few liquefied gas terminals that would let it send gas anywhere. New connections to China are years away.
“Russia’s capacity to divert gas flows to China is very limited now and by the time it grows, the EU will have other options,” said Alicia Garcia Herrero, chief economist for the Asia Pacific region at Natixis bank.
Rystad Energy said: “Russian gas exports bring in more than 300 million dollars for the Kremlin each day — revenues they cannot afford to lose.”
That is why analysts have regarded a total gas cut-off by Europe or Russia as unlikely. The two sides need each other.
– What does it mean for the long term?
The war has intensified questions about Europe’s gas dependence on Russia.
“The events of the last days show the imprudence of not having diversified our sources of energy and our providers in recent decades,” said Italian premier Mario Draghi in parliament on Friday.
Italy imports around 45% of its gas from Russia, up from 27% a decade ago.
Europe’s shortage of gas reserves this winter came about in part because Gazprom held off from selling gas on the spot market beyond its obligations in long-term contracts. That led to concerns that Russia was willing to use gas as leverage.
But finding new energy supplies will take years. Europe continues to need natural gas to fire its electricity plants until renewables are built up to provide enough energy and to make up for falling domestic production. Analysts at Energy Intelligence say tight supply is likely to keep prices high through the mid-2020s.
The long-term answer is to redouble efforts to develop renewable sources of energy to fight climate change, said Claudia Kemfert, energy expert at the German Institute for Economic Research in Berlin.
“Now we have to change course quickly, we have to get away from fossil energies as quickly as possible,” she said. “We are in a new era. There is a day before Russia invaded Ukraine and a day after. Prices for fossil energies are rising, and we are paying the price of the delayed energy transition.
“The best answer to fossil fuel wars is a significantly accelerated energy transition. It will bring peace.”