Putin’s War in Ukraine Forces New Energy Reality on Europe

During President Joe Biden’s visit to Europe, the US has struck a deal with the EU to boost its liquefied natural gas (LNG) supply as the trade bloc seeks to reduce its dependence on Russian gas. The war in Ukraine highlighted the Old Continent’s unsustainable Russian energy habit.

On Friday, Biden said the US will supply, “an additional 15 billion cubic meters of LNG this year. “This announcement came as Washington and Brussels unveiled the formation of a task force to reduce Europe’s reliance on Russian fossil fuels following Putin’s invasion of Ukraine. Under the deal, EU demand for US LNG will eventually rise to 50 billion cubic meters. The White House added that the US and EU would work jointly to accelerate renewable energy plans and reduce dependence on gas through expanding the use of heat pumps and improving energy efficiency.

Russia’s invasion of Ukraine has rocked Europe to its core. As the Russian military ravages Ukrainian cities, policymakers across the continent scramble to rethink their failing energy strategy. Europe spends as much as $1 billion a day on coal, gas, and oil imported from Russia, indirectly funding its war machine.

Nearly 45% of its gas imports, 45% of its coal, and 25% of its crude oil supplies come from Russia – an unsustainable wealth transfer to an aggressor whose forces attack children in bomb shelters and maternity wards and who threatens the use of nuclear weapons in Europe.

Gas is most challenging to replace. The EU aims to reduce the bloc’s gas imports from Russia by nearly two-thirds before the end of the year and make itself independent from all Russian fossil fuels by 2030. The short-term goal appears dubious, and we will revisit it in December of this year. The long-term goal may be feasible.

The EU plans to diversify gas supplies, improve energy efficiency, run existing coal plants at full throttle and postpone the retirement of others to reduce the reliance on Russian gas imports.

With President Vladimir Putin threatening to respond to Western sanctions with an energy embargo of his own, the race to abandon Russian hydrocarbons is afoot.

Last week, German Energy Minister Robert Habeck began a three-day trip to Qatar and the UAE. European Commission Executive Vice President Frans Timmermans and Energy Commissioner Kadri Simson may follow suit and travel to the Arab Gulf to improve energy cooperation. Brussels should not make the same mistake as Washington in embracing Tehran.

With global supplies tight at present, giant gas exporters like Qatar could provide an alternative for Europe, but it would require diverting cargoes from other customers with long-term contracts in Asia. Thus far, Doha has been reluctant to do so. In the interim, increasing piped gas from Azerbaijan, Norway, and Algeria can help replenish storage.

As distributors hurry to refill depleted gas storage before next winter, Europe’s gas demand will likely surge. New proposals require all storage facilities to reach at least 80% capacity to avoid shortages during peak demand.

The US has already increased energy exports to the EU substantially. This year nearly 75% of American LNG exports have gone to Europe compared to only 34% last year. Spain and Portugal have the LNG terminal capacity but are not well-connected by pipeline to the rest of the continent.

While ten European import terminals are currently being built or planned, some projects lack adequate financing. Brussels may provide loan guarantees to lessen financing costs and accelerate construction. The European Investment Bank in Luxemburg should prioritize funding for natural gas terminals, pipelines, and processing stations.

European companies should consider increasing energy efficiency and replacing natural gas with other fuels. Speeding up the replacement of gas boilers with heat pumps that use electricity and are three times more efficient can reduce gas demand.

Nuclear power is emissions-free and highly dependable— an ideal baseload power source. Unfortunately, new plants cost billions of Euros and require a few years to be built. It is an emission-free, but not an immediate, solution. However, extending the lives of existing nuclear fleets can help reduce total gas consumption.

Russian coal is likely the easiest to replace. The largest coal exporter globally, Australia was left with an additional export margin when China banned its imports two years ago. Independent producers like Whitehaven Coal and New Hope Coal have already been approached to replace Russian suppliers. Together with the US, the two countries can replace 70% of Russian coal imported into the EU.

Europe wants to believe that burning coal is a short-term solution. European policymakers hope that reviving coal will be a tool to curb spiraling natural gas prices and replace Russian gas. The rapid establishment of new supply chains and reviving coal-power capacity would not be an easy task, not to mention the political pushback from environmentalists who wish to see it scrapped entirely and ignore both security and economic pressure to burn coal. A rise in emissions for at least a year may be necessary while the EU scrambles to ensure its energy security.

Oil is trickier to replace. Spare capacity in Saudi Arabia and the United Arab Emirates could partially substitute for Russian supplies and lower energy prices. However, the two Gulf countries have signaled disinterest in ramping up production due to frustration with the Biden Administration which is pushing through a weaker JCPOA nuclear Iran deal than its Obama-era predecessor.

Even if other sources of oil can be secured, where imports originate poses issues. European refineries are optimized for heavier Russian Urals brand oil, rendering them less effective if imported crude from other countries. Adjustments may take months and cost billions. Likewise, intra-European oil pipeline infrastructure is designed for east to west flows, complicating the transportation process. In short, solutions related to oil shortages would likely require high levels of coordination between countries.

Putin’s war exposed the rickety foundations of European energy security. New energy fundamentals are necessary to ensure growth and wean Europe from its Russian habit. Unrealistic goals to accelerate the phase-out of fossil fuels and nuclear energy and increase the share of renewables in the energy balance remain a part of the EU narrative. The hard truths of warfare, supply chain disruptions, Asian demand, and high energy prices will force our well-meaning European cousins to face reality and make the necessary – and tough – decisions.

With assistance from Andrius Urbelis and Sarah Shinton