While Putin doubles down in Ukraine, his gas gambit is failing

The writer is Lester Crown Professor in the Practice of Management at Yale School of Management

As Russia launches missile strikes on Kyiv and other major cities across Ukraine, President Vladimir Putin’s plans to stoke fears of a European freeze this winter are on the point of backfiring.

While Russia needs to sell the EU its natural gas, Europe no longer needs these supplies. Gas is becoming a buyer’s market. The energy crunch should be no threat to unified support for Ukraine, let alone Europeans’ comfort this winter, despite Putin’s machinations.

Certainly the alleged sabotage of the active Nord Stream 1 pipeline and the unopened Nord Stream 2 pipeline has shut down two sources of Russian gas, but the EU no longer needs them. Similarly, Putin’s fresh threats to cut off Russian gas still being sent through the Ukrainian transit pipeline system are intended to spark renewed concerns in Europe. But Europeans should be warmed by the burst of gas transforming markets this autumn.

Much attention has been focused on the demand side of the market equation: the reduction or destruction of demand, rationing and switching away from natural gas. Basic economic reasoning, however, means we should not forget the supply side.

Analysis of underlying supply patterns reveals that, contrary to common belief, Europe is securing enough gas and liquefied natural gas from global markets to fully substitute for lost Russian supplies already. What is more, it can fully replace every last bit of Russian gas without any need for demand destruction or even substitution away from gas.

Since the invasion of Ukraine in February, EU sourcing of Russian gas has plummeted from 46 per cent to 9 per cent. This pivot came partially through increased piped gas from Norway and Algeria. Even more noteworthy, the dramatic increases in shipped LNG imports from the US and elsewhere have replaced the lost Russian vaporous gas from the targeted pipelines. This new supply surge to the EU now approaches, based on our calculations, 40 per cent of total global LNG supply.

It is easy to overlook this revolution because it is still very new. But a review of every large LNG development project, liquefaction terminal and production field shows that this year alone, more than 100bn cubic metres of additional supply is expected to be brought online. This is a 20 per cent increase in total LNG supply.

With demand for LNG declining in the rest of the world, particularly in China, the new additions to global supply are enough to fully replace Europe’s dependence on Russian gas from the Nord Stream and Ukrainian transit pipelines. So much for Putin’s “gas supply crunch”.

To be sure, LNG is expensive and consumers and businesses are understandably concerned about skyrocketing energy costs. But this is a separate question from whether there is enough gas for Europe to fully replace Russian supply.

European governments are clearly already prioritising fiscal relief for consumers with respect to both building-heating (42 per cent of gas consumption across the EU) and electricity costs (28 per cent of gas consumption), with massive subsidies and transfer payments on an unprecedented scale.

European industry, which accounts for 30 per cent of gas consumption, has long feared structurally higher gas prices, but the data suggest that the potential economic impact is considerably less than feared.

The most natural-gas intensive sectors — metals, chemicals, paper, coke, fertilisers and refined petroleum/minerals processing — account for a quarter of the region’s natural gas usage, but only 3 per cent of the total gross value added in Europe, and less than 1 per cent of the total European workforce.

All the data suggest that, contrary to fears of a supply crunch, Europe is securing enough gas and LNG from global markets to fully replace supplies from Russian gas. Putin, by contrast, will be losing what we conservatively estimate to be $100bn from lost gas sales annually.

Having undermined his country’s reputation as a reliable energy supplier, which the Soviet Union maintained even at the height of the cold war, Putin has very little existing export capacity and faces difficulties in building more given icy conditions and the challenges of Arctic shipping. The single pipeline connecting Russia to China carries 10 per cent of the capacity of Russia’s European pipeline network, and China is not rushing to build any new ones.

So the only losers from this gas blackmail are Putin and his enablers.