Out in the cold: The race is on to solve the Russian gas puzzle

The extra 15 Bcm of gas Biden has promised this year will only start the process of weaning Europe off Russian gas. Europe does import about 80 million tonnes of LNG a year already and has spare receiving and storage capacity so has the ability to absorb those tonnes and probably, with some investment, the 50 million envisaged by the deal by 2030.

To completely displace the Russian gas, however, it will need both LNG production to expand and to build the new terminals and distribution networks to receive and distribute the vastly increased volumes of LNG.

It is obvious that, even if it can redirect some of the gas that it has been exporting to Europe to other markets, the invasion of Ukraine and the severity of the response from the West will do severe long-term structural damage to the Russian economy regardless of how Ukraine’s fate is resolved.

While there are new gas fields being developed by Qatar and off the north-west coast of Australia and one new export terminal under construction in the US (with about 27 more in the pipeline for approval) their impact, even if their development were accelerated, will be felt in the second half of this decade at the earliest.

That’s not to say, however, that the Europeans can’t significantly reduce their purchases of gas from Russia and significantly damage its energy sales-dependent economy in the process.

Germany, the most dependent of the European economies on Russian gas is, for instance, in urgent negotiations to secure three floating regasification units. It has already reduced its gas imports from Russia from 55 per cent of its total gas supply to 40 per cent and plans to build two LNG import terminals. The cost of a terminal is about $US1 billion ($1.3 billion).

The EU itself has said it wants to cut its Russian gas imports by two-thirds – about 100 million Bcm – by the end of this year by diversifying its supply, bargaining for gas as a single unit rather than individual economies, speeding up the roll-outs of renewable energy projects, increasing the reserves in storage and substituting alternatives – renewables, coal and nuclear – in heating and power generation.

Russia’s invasion of Ukraine will transform the global energy map. It will also put a floor, at a very high level, under the demand for and pricing of LNG. Europe will have to pay a premium over already-elevated prices to get sufficient gas to have a meaningful impact on its Russian energy dependence. It is going to have to compete with the traditional major buyers in Asia.

It might be helped by China’s commitment, struck just ahead of the invasion, to buy an extra 10 Bcm of gas a year for the next 30 years. Russia exported almost 17 Bcm to China last year. New pipelines that Russia is planning could see the volumes greatly increased, although they would still fall well short of the current European sales and would be at much lower prices.

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It is obvious that, even if it can redirect some of the gas that it has been exporting to Europe to other markets, the invasion of Ukraine and the severity of the response from the West — including Europe, where the reliance on Russian energy was supposed to give the Kremlin leverage and coerce the Europeans into acceptance of Ukraine’s fate — will do severe long-term structural damage to the Russian economy regardless of how Ukraine’s fate is resolved.

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