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Irina Slav

Irina Slav

Irina is a writer for Oilprice.com with over a decade of experience writing on the oil and gas industry.

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Could Europe Really Return to Russian Gas?

  • Cutting import independence from Russia has been a priority for many EU countries this year.
  • Bloomberg’s Javier Blas: Europe will start buying Russian gas again, but may not return to the same long-term contracts.
  • Europe will need cheap gas to keep its industries competitive on a global scale.

 

Germany has ended its reliance on Russian gas. The news made some cheer and others smile sarcastically while they ask to see the bill. Cutting its independence on Russia for natural gas has become priority number one, not just for Germany but for the whole European Union. For now, it’s working. The problem is, this sort of approach can’t work for long.

Bloomberg’s Javier Blas made the argument that Europe will start buying Russian gas again in December, noting the obvious price differences between pipeline gas and LNG that comes from halfway around the world.

“Europe will probably never go back to the same long-term contracts of the past with Russia, and likely would need to import less gas as time goes by, thanks to renewable energy,” Blas wrote. “But if it is going to keep its chemical, food and heavy industries competitive, it will need some cheap gas. And there is no cheaper gas for Europe than Russia’s.”

He then went on to draw a parallel between the war in Ukraine and Iraq’s invasion of Kuwait, which did not end Iraqi oil exports to the United States. It is a convenient parallel, although the situation is rather different, and not just because Iraq was not a nuclear power when it invaded Kuwait.

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Related: Will Oil Continue To See Extreme Volatility?

Leaving geopolitics aside, however, the fact that Russian gas is the cheapest for Europe cannot be overlooked. The switch to LNG has cost Europe more than a trillion euros and is still costing it because while gas prices have fallen to levels from before Russia invaded Ukraine, they have not fallen back to levels from 2021 before the gas crisis began. And they may never if Europe continues on its current path.

“The Europeans today are saying there’s no way we’re going back,” the head of QatarEnergy and energy minister of Qatar, Saad Sherida al-Kaabi, said this week at the Atlantic Council Energy Forum in Abu Dhabi.

“We’re all blessed to have to be able to forget and to forgive. And I think things get mended with time… they learn from that situation and probably have a much bigger diversity [of energy intake],” he added, as quoted by CNBC.

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This statement must have caused some annoyance in EU political circles, but it certainly echoes the fact that Javier Blas pointed out in his December column: so far, Europe’s economy has thrived thanks to cheap energy. Take away the cheap element of the energy equation, and the economy will suffer.

Right now, there’s much cheer that Germany did not slip into a recession last year. Instead, its GDP booked a 1.9-percent gain. That’s certainly good news, but it’s worth remembering that not all economic shocks strike immediately. Some have a delayed effect.

Europe’s largest economy may have grown, but what is it going to do when BASF moves some of its business out of the country and never returns it? What is it going to do for all those businesses that are only surviving on state aid? And, ultimately, how long will the government be able to provide this state aid?

What’s true for Germany is true for the rest of the EU, too, even though Germany’s Russian gas dependence seems to have been the heaviest. Energy costs are up, and they are about to stay up unless cheap gas returns.

Equinor’s chief executive said as much this week. Speaking to the BBC, Anders Opedal said he did not expect gas and electricity prices in Europe to return to where they were before the pandemic.

There is “a kind of re-wiring of the whole energy system in Europe particularly after the gas from Russia was taken away,” he said and, noting that the buildup of renewable energy needed to be accelerated, added that “This will require a lot of investment and these investments need to be paid for, so I would assume that the energy bills may slightly be higher than in the past but not as volatile and high as we have today.”

Europe may prove unable to “forgive or forget,” and, indeed, so may Russia because pretending Europe was an innocent victim of gas aggression does nothing to erase the fact the EU weaponized its financial and trade clout and used it in the form of sanctions just as aggressively as Russia did its gas. And this means Europeans are going to get poorer on a scale not seen in recent history.

By Irina Slav for Oilprice.com

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Leave a comment
  • Joris de Kleem on January 18 2023 said:
    The last thing Europe needs is to have a noose around it's neck and allow the US to dictate what is allowed and where their economy is going. Russian gas is essential for Europe to stay at the top. Fuck the USA.
  • Mamdouh Salameh on January 18 2023 said:
    It is inevitable that Russian gas will return to Europe but not at the pre-Ukraine-conflict level. But if the EU is going to keep its chemical, food and heavy industries competitive, it will need some cheap gas. And there is no cheaper gas for Europe than Russia’s.

    One salutary lesson emerged from the global energy crisis is that energy security and the energy needs of the economy take precedence over climate changes dictates and energy transition. This became blatantly obvious when the EU who has been lecturing the world on daily basis on the need for energy transition and climate change resorted to coal and resurrected coal-powered electricity plants to meet its energy needs in the face of skyrocketing energy prices.

    This lesson will soon become clearer to the EU members if the global energy crisis continues for the future with energy prices continuing to soar. That will be the time when they realize how much they are missing and needing the cheap Russian piped gas supplies compared with the exorbitant prices they are paying for US LNG supplies. The switch to LNG has cost the EU more than a trillion euros so far.

    Europe’s economies, prosperity and high standard of living were built on the back of abundant and cheap Russian gas. What is Europe going to do for all those businesses that are only surviving on state aid? And, ultimately, how long will the European government be able to provide this state aid?

    That would be the time when the Europeans decide to resume buying Russian gas. It will equally be the time when Nord Stream 1 and Nord Stream 2 are resurrected and repaired in anticipation of resuming the transport of Russian gas to the EU whether America likes or not.

    The word ‘never’ doesn’t exist in the dictionary of politics.

    Dr Mamdouh G Salameh
    International Oil Economist
    Global Energy Expert

Leave a comment




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