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| Liquefied natural gas tanks at a terminal in southeastern England. (Source: CNN) |
After decades of relying on Russia for cheap gas, resuming that dependence has become more unlikely than ever after an unexplained explosion hit the Nord Stream pipeline running under the Baltic Sea from Russia to Germany.
According to the Oxford Institute for Energy Studies, before Russia launched its special military operation in Ukraine, the Nord Stream 1 pipeline accounted for 15% of Europe's gas imports in 2021. Meanwhile, a second Nord Stream pipeline was planned but never operated.
At the time of the pipeline attack, gas prices in Europe were three times higher than before the start of the special military operation in Ukraine, and industries had to cut production to reduce gas consumption.
Overcoming the energy crisis spectacularly
Gas prices are now much lower. The European gas benchmark August contract on the Dutch ERC is trading at around 40 euros, compared with 180 euros a year ago.
"Our biggest risk is that Russia can manipulate the energy market. However, they no longer have this leverage," European Union (EU) Energy Commissioner Kadri Simson told Reuters .
The bloc has been quick to look for alternative sources of energy to Russia, she said.
According to EU figures, before launching its military campaign in Ukraine, Russia sent about 155 billion cubic metres (bcm) of gas to Europe each year, mainly via pipelines.
In 2022, pipeline gas imports to the EU will fall to 60 bcm. And this year, the EU predicts, it will fall to 20 bcm.
Coping with the shortage from Moscow requires the wider European region to address supply and demand, according to Reuters .
On the supply side, Norway has replaced Russia as the EU’s largest supplier of pipeline gas. The bloc’s imports of liquefied natural gas (LNG) have also increased sharply, led by supplies from the United States.
New pipelines carrying non-Russian gas opened last year in Greece and Poland. Finland, Germany, Italy and the Netherlands also opened LNG import terminals.
In Germany - Russia's largest customer in Europe - the focus is on new infrastructure.
To shore up supplies, the EU is buying non-Russian gas together.
The union introduced contingency rules requiring countries to share gas with their neighbours in times of energy crisis. The EU also agreed legal obligations for countries to fill their gas storage.
Across the EU, gas storage facilities are now 95% full, according to data from European Gas Infrastructure. When gas storage facilities are full, they will cover about a third of the EU's winter gas demand.
Last year, gas demand in the bloc fell partly due to a more active energy transition.
Europe is expected to install 56 gigawatts (GW) of new renewable energy capacity by 2023 – enough to replace about 18 bcm of gas this year. Last year, in particular, mild winter weather helped Europe weather the energy crisis.
Instability remains
Looking ahead, Europe is in “a pretty comfortable place” in the coming months, said Gergely Molnar, a gas analyst at the Paris-based International Energy Agency (IEA).
Analysts see a return to the record highs seen last year – peaking at €343/MWh in August 2022 – as unlikely.
Still, experts say that globally, gas markets are unusually tight, leaving Europe vulnerable to price spikes due to extreme weather or any other supply shock, such as Russia cutting off gas and LNG to the region altogether.
Any such spike would increase pressure on politicians as Britain, Poland and the Netherlands face elections next year in which the cost of living crisis is expected to feature prominently.
Some analysts also say that falling energy prices could permanently shrink the bloc's industrial activity.
The gross domestic product (GDP) of Europe's largest economy is expected to shrink in the fourth quarter of 2023, due to a downturn in industry, according to Germany's central bank.
Energy Aspects estimates that 8% of average 2017-2021 industrial gas demand in Belgium, the UK, France, Germany, Italy, Portugal, the Netherlands and Spain could be gone by 2024.
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