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Europe Seeks to End Reliance on Russian Energy

Over the past two years, Europe has rapidly distanced itself from Russia's energy commodities in protest to Russia's war in Ukraine. The European Union's embargo on the import of crude oil from Russia came into force in December 2022, followed by an embargo on oil products (including petrol and diesel) in February 2023. Meanwhile, natural gas imports fell more than 70% to 43 billion cubic meters (bcm) in 2023 from 150 bcm in 2021. And now reports have emerged that Germany and the Czech Republic are pushing the European Union to completely eliminate the remaining energy sources Europe imports from Russia.

According to Reuters, the two countries will ask Brussels to kick off regular high-level talks - potentially among countries' energy ministers to end the remaining imports of Russian energy.

Although the EU has largely replaced Russian gas with natural gas (mainly in the form of LNG) from the United States and Norway, the bloc still got 15% of its gas from Russia last year. Last year, Russia sent more than 15.6 million metric tons of LNG to the EU, good for a 37.7% jump compared to 2021, the year before Russia's Ukraine invasion. Reuters has reported that Berlin and Prague plan to make the call during a meeting of EU countries' energy ministers in Brussels on Thursday. The ministers are set to discuss the obstacles they are facing in phasing out the still-high Russian energy imports.

The latest move by Germany and the Czech Republic represents the latest attempt by EU members to work to fully sanction Russian gas imports. However, some EU members--including Hungary and Austria--remain heavily reliant on Russian gas. This implies that countries in support of a full ban can expect considerable pushback, with Hungary previously saying it would block such a move. The bloc has already banned imports of Russian coal and sea-borne crude oil, with exemptions for some land-locked countries.

Source: Bruegel.Org

Sanctions On Russian LNG

Over the past two years, the EU and its Western allies including the United States have imposed a raft of sanctions on Russian energy commodities, including a $60-a-barrel cap on Russia's seaborne exports of crude oil. They have, however, avoided placing limitations on Russian gas as they tried to establish new source markets. Thankfully, the continent has been wildly successful at replacing Russian gas, managing to emerge from last winter with gas inventories at record levels. Europe's search for new markets has been aided by record natural gas production in the U.S. as well as reduced heating demand thanks to two consecutive mild winters. Norway and the U.S. have replaced Russia as Europe's biggest gas supplier: Last year, Norway supplied 87.8 bcm (billion cubic meters) of gas to Europe, good for 30.3% of total imports while the U.S. supplied 56.2 bcm, accounting for 19.4% of total.

Beaming with confidence, Europe is now getting ready to pull the trigger: Politico has reported that the European Commission has proposed sanctions on Russia's LNG sector as part of Brussels' 14th sanctions package against Russia. Under the proposed sanctions, EU countries would be prevented from re-exporting Russian LNG after receiving it and also ban EU involvement in upcoming LNG projects in Russia. The measures, however, wouldn't directly bar Russian LNG imports to the EU. Similar to previous sanctions, the proposed import ban is meant to disrupt Putin's ability to continue financing his war in Ukraine. Although Russian LNG accounted for just 5% of the bloc's energy consumption in 2023, it still netted the Kremlin ~$8 billion in revenues. 

A full ban on Russian gas by the EU is very likely to trigger another gas price rally.

Natural gas has staged a big rally, with Henry Hub prices jumping from $1.61/MMBtu on 26th April to $2.66/MMBtu in Thursday's intraday session as markets increasingly price in more risk premium on the heated-up situation in the Middle East and Europe gets ready to ditch more Russian gas. Meanwhile, European natural gas prices eased slightly to €34 per megawatt-hour, close to the five-month high of €35.4 touched on May 23rd, amid expectations of lower supply amid robust cooling demand. The weatherman has forecast aggressive heatwaves in Europe later in the summer, with hotter temperatures expected in Northern Europe at the beginning of June, as well as excessive heat in France and Spain. Hot temperatures in Asia have also intensified bidding competition for LNG in major hubs, underscored by the 16.7% annual jump in imports from Japan in April. 

On the supply side, European courts may rule it illegal for Austria's gas giant OMV to pay Russia's Gazprom for gas exports, potentially risking supplies to the country.

By Alex Kimani for Oilprice.com

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Alex Kimani

Alex Kimani is a veteran finance writer, investor, engineer and researcher for Safehaven.com.  More