The Russians cited their own low inventory levels and a need to rebuild their reserves for their lower supply but the cynics saw geopolitical influences – leverage to gain approval for its completed Nord Stream 2 gas pipeline into Europe and leverage over Europe for its ambitions towards Ukraine — at play.
In the final quarter of last year Russian gas supplies to Europe were 25 per cent lower than in the same months of 2020.
The controversial Nord Stream 2 pipeline runs under the Baltic Sea and circumvents the need to pipe about a third of Russia’s gas exports to Europe through Ukraine and pay transit fees.Credit:AP
The build-up of the troop levels on the border with Ukraine has “coincided” with further reductions in Russia’s gas supplies to Europe, causing the International Energy Agency to accuse Russia of holding back at least a third of the gas it could send to Europe because of its designs on Ukraine.
Europe’s reliance on Russian oil and gas (about half its oil production also goes to Europe) gives the Russians a bargaining chip to try to keep Europe on the sidelines and to create division within Europe.
Germany is heavily dependent on Russia – more so than the other major European economies — for its energy requirements.
It has been very supportive of the controversial Nord Stream 2 pipeline (which runs under the Baltic Sea and circumvents the need to pipe about a third of Russia’s gas exports to Europe through Ukraine and pay transit fees) and has expressed opposition to US suggestions that Russia could be locked out of the SWIFT global payments system as a powerful sanction if it invades Ukraine.
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With European gas inventories at record low levels for this time of year – they are less than 50 per cent of storage capacity — the region is vulnerable and even more so if its stance on Ukraine and the response to an invasion is divided.
The US has lifted exports of LNG to Europe and is encouraging LNG exporters like Qatar to boost supply to Europe and China, awash with gas after last year’s binge, is offering spot LNG cargos.
In the longer term the experience of the past four or five months might strengthen Europe’s resolve to reduce its dependence on Russia by diversifying its energy supplies and further accelerating its plans to decarbonise – and perhaps withholding approval for the $US11 billion ($15.4 billion) Nord Stream 2 pipeline to start operating.
That would hurt Russia, which relies on oil and gas sales for more than 40 per cent of government revenues, but in the meantime increased LNG imports aren’t going to solve Europe’s immediate supply issues.
US shale oil and gas production is already responding to the higher prices – it has displaced Australia as the world’s biggest LNG exporter – and a sector with in-built flexibility will inevitably respond further if the current prices are sustained.
Europe’s reliance on Russian oil and gas (about half its oil production also goes to Europe) gives the Russians a bargaining chip to try to keep Europe on the sidelines and to create division within Europe.
The US Government has approved a spate of new export terminals to try to take advantage of the increased demand for US gas from China (which is trying to reduce its reliance on its major supplier, Australia as part of its punishment for Australia’s temerity in criticising its human rights record and supporting inquiries into the origins of COVID-19) and from Europe, which is belatedly building new import terminals.
The threat to its own revenue base if it does provoke Europe into a major diversification of gas supplies, along with the array of potential financial sanctions the US is preparing, would be the major deterrent to an actual invasion of the Ukraine by Russia.
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The mere threat that it could cut off Europe’s energy supplies might be potent enough to achieve its objectives of ensuring Ukraine doesn’t join NATO, pushing NATO’s presence further away from its borders and sowing disunity within Europe.
An actual reduction in Russian oil and gas supplies to Europe and the sanctions on Russian exports that would follow would probably send energy prices into the stratosphere, given the inability of other producers to ramp up production quickly.
The last thing a world still recovering from the worst economic effects of the pandemic and already experiencing an outbreak of inflation at levels not seen for decades needs is $US100 a barrel-plus oil prices and a global energy crisis.
