EU: Gas and Oil Policy Response

Published on March 3, 2022
SGH Insight
The Commission will propose next week that the short-term action to reduce dependence on Russia should be to buy more LNG from the United States and Qatar. Each EU region now has a direct or indirect connection with an LNG terminal, so that at least is doable.

The second move will be to ensure gas storage facilities in Europe are at least 80% full by the end of September every year, to be ready for the winter. To drive that home, the Commission wants to propose a law that obliges EU governments to observe that.
Market Validation
Bloomberg 4/7/22

EU Parliament Backs Plan to Fill Gas Reserves Ahead of Winter

The European Parliament endorsed a proposal
by the European Commission to replenish the bloc’s depleted
natural gas reserves to 80% of capacity by Nov. 1.

* Assembly backed the plan in a fast-track vote on Thursday,
paving the way for talks with member states on the final shape
of the regulation

The southern Ukrainian port city of Kherson has fallen to Russian Federation troops, with Mariupol and Kharkiv under siege, and with historic Odessa, where Russia’ President Vladimir Putin has explicitly vowed to avenge the deaths of 46 pro-Russia activist in 2014, we suspect also in line.

We believe it is inevitable that political pressure on the US and EU will mount from here to include Russia’s lifeline, its oil and gas industry, under the West’s sanctions regime, even as that remains an enormously heavy lift for those leaders concerned about the potentially heavy blowback from energy supply cuts to their own economies. The advent of warmer weather may soon play into that calculus as well.

For now, however, there is no appetite in the European Union to impose any immediate curbs on gas and oil imports from Russia. That hesitation comes not just from Germany, whose heavy reliance on Russian gas is well documented. Italy, Austria, Hungary, Finland, the Czech Republic, France, even the fiercely anti-Russian Poland and Baltic states, all depend to some extent on Russian gas supplies.

The European Commission will nevertheless present next week a proposal on the EU’s energy strategy that was originally to be presented yesterday, but which was postponed, to be re-drafted, with the Russian invasion of Ukraine.

The original energy strategy proposal was to be a more generic discussion of how to ease the pain of high energy prices and prevent such rises in the future. The new proposal will now focus on how to reduce Europe’s dependency on Russia in its energy imports.

European Commission President Ursula von der Leyen has been stressing the need to make the EU independent of Russian gas, and as reported last week, Germany has changed its tone in much the same way, looking to build two new LNG terminals as the realization has finally swept the country that its dependence on Moscow is indeed an enormous economic and political liability. Italy, also reliant to a large extent on Russian supplies, is in talks with Azerbaijan to secure more gas from there, with a direct pipeline in place between the two countries.

None of this will happen overnight, but the movement away from Russian energy has begun, and there will be no turning back.

The Commission will propose next week that the short-term action to reduce dependence on Russia should be to buy more LNG from the United States and Qatar. Each EU region now has a direct or indirect connection with an LNG terminal, so that at least is doable.

The second move will be to ensure gas storage facilities in Europe are at least 80% full by the end of September every year, to be ready for the winter. To drive that home, the Commission wants to propose a law that obliges EU governments to observe that.

There is also a revived Commission proposal that the EU jointly buy and store gas — an idea that has been stalled for some time because countries like Germany or the Netherlands were not keen on such collectivization. But the situation has now dramatically changed.

In the longer term the EU plan, with an eye to its environmental objectives, is to sharply increase its production of alternative gases like hydrogen and biogas. The Commission will suggest the EU produce 35 billion cubic meters of biogas by 2030 – a huge jump from the 2.3 billion produced in 2018. The Commission will also propose treating state aid for hydrogen as a matter of priority to produce more hydrogen, which can be used in the installations using gas now.

If the EU were to fully implement all its current climate laws, the bloc’s dependence on gas we are told would fall by 23% by 2030 — the bulk of which would be felt by Russia since it supplies 40% of the EU’s gas consumption (and 45% of total gas imports). Russian crude oil is already being shunned on energy markets because of the Ukraine war, with buyers preferring to buy Brent and boosting its prices as a result.

Investment in renewable sources of energy like wind and solar of course will continue to take top priority in the EU, as will the energy renovation of buildings in Europe, which use up 40% of energy in the bloc.

But even if EU countries were to implement the EU’s already adopted energy efficiency and renovation legislation, it is estimated that would save Europe just 17 billion cubic meters of gas — by 2025. By comparison, EU imports of natural gas from Russia in 2021 were 155 billion cubic meters.

 

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