Gas is at the heart of the equivocation currently on show in the chancelleries of continental Europe. As Russian forces mass on the border with Ukraine, European politicians are faced with a stark choice: support Ukraine and potentially have to deal with a very cold and rather angry electorate at home, or prevaricate.
The latter is what happened when Russia annexed Crimea in 2014. Yet dependency on Russian gas has only deepened since then, as the rest of Europe’s gas output has continued to decline, while coal-fired power stations and nuclear reactors have been shuttered in advance of replacement renewable capacity.
Germany has led the way, closing nuclear power stations in favour of (far less reliable) renewables, while simultaneously building out its gas import capacity. Key to that strategy is the Nord Stream 2 pipeline, which the United States now says ‘will not move forward’ if Russia invades Ukraine. If it does come onstream this year the pipeline, which bypasses Ukraine, will double the volume of gas Russia can export directly to Germany via the Baltic Sea. At 10 billion cubic feet per day (bn cfd), this will account for over 20% of total European gas consumption.
No wonder, then, that Germany has been dragging its feet: UK weapons shipments have had to divert around German airspace, while Berlin has denied Estonia permission to send German-made artillery pieces to Ukraine.
With Putin in a position to twist Germany’s arm and blackmail other European members of NATO into paralysis, policymakers and strategists have begun casting around for ways to offset any gas supply disruptions and get the diplomatic cogs moving again. Importing liquefied natural gas (LNG) – especially from the US – has been touted as one solution.
Thanks to the shale revolution, the US is on track to become the world’s largest exporter of LNG this year, overtaking Qatar and Australia. But if Russia does turn the taps off, could the American – perhaps aided by another large LNG exporter – actually make up the shortfall in Europe? Unfortunately, for material, legal and strategic reasons, the answer is ‘probably not’.
Turning up the volume
Firstly, European gas consumption over the last five years has averaged around 48 billion cubic feet per day (bn cfd), with a seasonal skew towards the winter. Gas imports account for a little over half of that total, and over 60% of imports (about 18bn cfd) come from Russia.
The LNG spot and short-term market (i.e. contract lengths under four years) has grown quite rapidly over the last decade and now represents around 30% of global trade in LNG, equivalent to about 16bn cfd of natural gas. So even if Europe could somehow grab this entire market for a few months, outbidding the likes of China and India; – and even if it could get the import infrastructure in place – it still wouldn’t be enough to make up the shortfall. And the prices would be eyewatering.
An alternative might be for the American government to redirect all outbound US LNG cargoes to Europe – equivalent to about 11.5bn cfd. Since US LNG exports account for most of the growth in the spot and short-term market over the last decade, that doesn’t leave much that can be secured by that route. So other countries will have to be persuaded or coerced into diverting another 5bn cfd or so – the equivalent of about half of Qatar’s annual exports.
However, even supposing the USA and Europe could strongarm international energy companies and sovereign states into diverting LNG to Europe in the event of a Russia invasion, there would be some pretty big legal problems.
More than two thirds of the global trade in seaborne LNG is still conducted on the basis of long-term contracts – 20 or 30 years is by no means uncommon. This reflects the economics of LNG mega-projects, where sealing lengthy offtake agreements is usually a prerequisite to de-risking construction and securing finance.
Diverting cargoes would involve breaches of long-standing contracts. Force majeure would be the usual way to avoid heavy financial and legal penalties while doing so. But force majeure is for when operations are disrupted by natural disasters or civil wars. It’s hard to see how it would apply in these circumstances – a conflict in the Donbas or along the Dnieper does not imperil facilities in Louisiana, Ras Laffan or Queensland.
Coercing companies and countries into rerouting cargoes would also look pretty hypocritical, given many of the arguments for supporting Ukraine rely on ideas such as ‘a rules-based international order’.
This points towards further, strategic obstacles to rerouting LNG cargoes to Europe. Many of these long-term LNG contracts are with importer countries such as Japan, South Korea and India – key US allies in its pivot to the Indo-Pacific, where it is seeking to counter the rise of China. That would raise a simple question with a complex answer: should the US prioritise Europe or the Pacific? As the 21st century unfolds, this is likely to become an increasingly acute dilemma for the USA across a range of domains.
So, American LNG is not going to come to the rescue if Russia completely turns the taps off: the volumes are not there, and even if they were – which in a few more years might be the case – the legal and strategic obstacles are formidable. What can European states do about this?
In the short term, not very much at all, while in the longer term, green tech might offer a solution. In the medium term – looking ahead to further Russian threats, perhaps – there are more concrete options, like more nuclear and fracking. But taking up either of those options is going to mean a strategic rethink.
Too many countries are still pursuing energy policies formulated when the arc of history seemed to be bending towards the global triumph of liberal democracy, rather than the new age of multi-polar great power competition that is upon us. Nowhere is this more apparent right now than in the geoeconomics of natural gas and the fate of Ukraine.
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